A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

April 20, 2015

Stepping out: New household formations and Millennials
Monthly U.S. Household Formations vs Average


Source: Bloomberg, as of 12/31/2014. The red horizontal line represents the average from Feb 1956 (when the series begins) through December 2014.

The bottom line:

  • US household formation—which reflects people leaving home to rent or buy their own residence—rose dramatically in the last quarter of 2014, from 818,000 at the end of September to 2,001,000 at the end of December.
  • That's a level not seen since late 2005, and a stark contrast to the below-average levels that have prevailed in the interim.
  • That's a welcome signal that Americans may be more confident in their economic prospects—particularly the countless Millennials who've conserved cash by living with parents rather than striking out on their own.
  • While some pundits have conjectured that there's something about the Millennials' mindset that explains the weakness in household formations, the housing bust that began in early 2006 (which made home loans harder to come by) and poor economic conditions since then are probably more relevant than inter-generational differences.
  • Whatever the case, employment and wage gains for younger workers are now improving (although still depressed relative to history). Unemployment rates for adults 25-34 have come down from 6.8% to 5.6% over the past year; for 20-24 year olds, the shift is even greater, from 12.2% to 10.4%.¹
  • Meanwhile, during 2014, median usual weekly earnings increased 4.3% for 20-24 year olds and 6% for 25-34 year olds compared with no gain for 35-44 year olds and only a 2.2% gain for 45-54 year olds.²
  • Of course, sustained improvement in household formation would likely bode well for the housing market—home sales, housing starts and building permits are still lackluster—and the related purchases of appliances and other durable goods.
  • And better prospects for the estimated 77 million Millennials would presumably have ripple effects on other areas—including the investment industry.
  • When it comes to investing, Millennials are often described as skeptical—not surprising given events of the past decade. But as with household formation, it can be easy to misinterpret pragmatic decisions based on current conditions with cultural preferences.
  • The inroads made by so-called "robo-advisors" with that generation could easily fade as the Millennials find themselves in command of greater wealth and facing the more complex decisions that go with starting families and providing for their future—decisions that live financial advisors have been helping with for decades.

¹ Source: US Bureau of Labor Statistics. Reflects change from March 2014 to March 2015.
² Source: US Bureau of Labor Statistics, as of 12/31/14.

The chart:

  • The chart shows the level of new household formations in the US on a monthly basis from December 2004 through December 2014 (the latest available).
  • The red horizontal line represents the average level of 1.13 million calculated from February 1956 when the series begins.
  • Note that new household formation was above average in each of the final three months of 2014—the first readings above average since late 2006.


The Millennial Generation (or Generation Y) refers to people born between 1980 and 2000.


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Will the current wave of central bank easing jump-start the world's economies?


Will the current wave of central bank easing jump-start the world's economies?

No - The real issues are structural - real progress on labor reform and regulatory excess will have more impact
No - Deflation is already taking hold, making monetary policy changes ineffective
Yes - The US model shows that monetary easing can help economies heal in the medium term
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact

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