If more people are earning salaries, shouldn’t U.S. gross domestic product (GDP) be higher? This question speaks to the demand piece of inflation; it’s the ‘other riddle’ confronting policy-makers, particularly as lower gasoline sales have failed to translate into retail gains. After all, we should see pent-up retail demand from new workers earning their first pay checks, so what’s the hold-up? When the financial profile of young workers is considered, student loans stand-out as an obvious outlier; the category has doubled in size to reach $1.4 trillion since 2008, eclipsing both credit card debt (at $955 billion) and auto loans (at $700 billion), as overall household debt has been reduced. This means that deleveraging since 2008 has been at the home-owner levels, where gains are likely a simple function of price. The Millennials, equal to 32% of the workforce, have not benefited from that tailwind.
How high is the student loan burden? According to Edvisors, the average graduate in the Class of 2014 left college with student-loans of $33,000, roughly two-times higher than the average inflation-adjusted borrower in 1993. Another study from the Federal Resave Bank of New York found the implied financial burden of student loans to be 2x as powerful (to the downside) on average as normal recession conditions. The problem isn’t getting any better either: the implied delinquency rate for borrowers with loans in repayment is now 27.3%. Data from the Federal Reserve Bank of New York further shows 48% of all U.S. 25-year olds living at home with their parents. By comparison, in 2003, the average U.S. 30-year old was 2x more likely to own a home (with some home-secured debt) than the same candidate today because of opportunity prospects alone.
What’s more, “student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households,” says Donghoon Lee at the Federal Reserve Bank of New York. This view corroborates with data from the Urban Institute showing 948 births per 1,000 for U.S. women below the age of 30, which is “by far the slowest pace of any generation of young women in U.S. history.” The Urban Institute notes that previous historical low points for twenty-something fertility rates occurred in the early 1930s and the late 1970s, and that the “U.S. might eventually face the type of generational imbalance that currently characterizes Japan,” if the situation is not reversed. “Economists say the recession ended in 2009, but nobody told American women,” says Kenneth Johnson (2012) at the University of New Hampshire, who estimates an additional 2.3 million babies would have been born in the U.S., if fertility rates had not dropped by 15% since 2009. After all, the number of U.S. women in their prime childbearing years (ages 20-39) rose by 1.6 million between 2007 and 2014, but there were 0.4 million fewer births last year.
Why care about babies? While there are many wonderful things about newborns, more babies mean higher household consumer spending, the primary mover of the U.S. economy, at more than two-thirds of GDP. To put numbers in the U.S. context, the annual cost of raising a newborn in the middle-income bracket is $13,000, so the above referenced 2.3 million missing births implies a $30 billion annual retail loss that is, instead, paying-down student loans. This is what economists call a loss in aggregate demand and the figure is comparable to the economic output of the State of Mississippi, with a population of 3 million. It also reflects the kind of growth the FOMC has been trying (without success) to replicate with its low-rate policy for 6-years. Having observed many couples raise children, one might even conclude the birth of a child is the very definition of pent-up consumer demand. Talk about stuff you thought you never needed? The idea supports decisions in countries like Singapore, which gives couples with children priority access to government housing alongside payments of S$6,000 per child (roughly $4,450) for their first two and an additional S$8,000 for a third child.
So, why are job gains not translating into retail sales? It’s because new workers are too busy paying-off student loans to focus on shopping at retail outlets. Unfortunately, low-cost credit has trickled-down to young workers in the form of student loans that are only becoming costlier and, unlike other types of consumer debt, cannot be eliminated under U.S. bankruptcy law. Absent any policy change, rising borrowing costs will cause the affordability gap to widen, which sets-the-stage for a decline in household formation and a drop-in home prices. To the extent it is a forward indicator, the contraction in fertility observed since 2009 suggests we are nearing the peak-point. There are simply not enough U.S. families with proper wealth to absorb the homes that baby-boomer retirees will want to sell at today’s prices. Rising interest rates will solidify this point.