Monthly Economic Review: May 2017

It is well understood that the key driver to current U.S. economic growth is consumer spending since it represents two-thirds of the U.S. economy. The consumer took a breather in early 2017, when spending grew by a lackluster 0.3 percent; households, however, didn’t totally take their eyes off the ball. The housing sector was a bright spot in the first quarter as residential investment soared 13.7 percent, the strongest quarter in two years. The housing market has had a muted recovery since the Great Recession but has recently gained traction and is now playing a key role in supporting overall growth and related retail spending. While numbers show somewhat erratic performance from month to month, data for new and existing home sales, home improvement spending and housing starts are increasingly positive and have greatly improved over the last year or two. The underlying fundamentals of employment and income gains, rising home prices and consumer confidence all point to the housing market continuing to contribute to economic growth.

An important factor influencing the housing market is the rate of household formations — the new households that are created when young people move out on their own, couples get married and so forth. Since the fourth quarter of 2014, household formation has been trending upward. While other factors influence the housing market, it has been waiting for the turnaround in formations for years. During the recession, the pace of household formation floundered, largely as a result of job losses. Fewer jobs meant fewer individuals had the ability to start a household and many people had to abandon their homes. For the first quarter of 2017, the Census Bureau’s Housing Vacancy Survey showed 1.2 million households were formed compared with the same period the prior year. That was a return to a normal pace of growth.

The growth in household formations appears to be due in part to basic demographic shifts, which include not only a young adult getting their own apartment but also population growth among older adults and their choices in where to live. The recent rebound in households creates demand for housing, pushing up rents and home prices. These changes signal homebuilders to increase new construction, which in turn contributes to overall economic activity. Whether a new household buys or rents, the increase leads to increased demand for household items purchased at retailers — which could include big-ticket items such as furniture, appliances and electronics.

The number of American households is in constant motion, and it is therefore difficult to predict whether current trends in household formation will continue to be a durable force in the housing recovery. Nonetheless, the recent gains fit with other data that show housing is playing an important role in the current economy and has an important effect on gross domestic product on a standalone basis.