The story of America’s recovery from the recession has been one of dashed hopes. In early 2010, and again early last year, the economy looked as if it might be starting to grow under its own power, only to slow markedly in the months that followed. So what should we make of the current signs of rebound? The employment report for February, which came out last week, was solid, meaning that businesses have created more than two hundred thousand jobs a month for three months in a row. Economic data show that the economy, and real incomes, grew at a fine clip at the end of 2011. And unemployment, while still painfully high, has fallen a full two points from its peak. Bitter experience might suggest that we regard these numbers with a jaundiced eye. But there are at least a couple of reasons to think that, this time, we aren’t looking at a false spring.
One good sign is that Americans are buying new cars again. That’s a major shift: annual new-car sales fell from a pre-recession peak of seventeen million to just 10.4 million in 2009, a thirty-year low. And, though the economy began to recover, auto sales didn’t. Credit was hard to come by, and even people with jobs were wary of making big purchases. So people bought used cars, or just repaired the vehicles they had. It’s no coincidence that the stock prices of auto-parts stores, like AutoZone, have risen in recent years. But the result of this is that the age of the average American car has kept going up, too; last year, the average car on the road was eleven years old—an all-time high. This means that there is a lot of pent-up demand for new cars, and there are signs that potential demand is starting to translate into active demand. New-car sales began to rebound over the winter, and last month they jumped sharply, up almost sixteen per cent from the previous year. Even if that figure was an outlier, at the current sales rate factories will soon be running at ninety per cent of capacity, which suggests that more demand will lead to more jobs. Indeed, in the past year automakers, and auto-parts makers, have added forty-five thousand workers. And, while Detroit is much smaller than it once was, the auto industry remains a huge business—many “foreign” cars sold in the U.S. are actually made here—so its return to health will have ripple effects across the economy.
There’s an even more important source of pent-up demand, though: all the young adult Americans who have spent the past few years living with their parents. Perhaps the most striking feature of this economic downturn is the way it changed the rate of household formation. Between 1947 (when the government first started collecting data on the subject) and 2007, the number of households in the U.S. rose every year, closely tracking population growth. This recession dramatically broke the trend. In 2008, 2010, and 2011, the number of households dropped, even as the population continued to grow. As Gary Painter, an economist at U.S.C., has argued, the decline in household formation was largely a response to the slow economy and soaring unemployment among the young.
The dwindling number of new households, which the economist Scott Sumner has called a “demographic depression,” isn’t just a result of the weak recovery; it has also been a major cause. We rely on new households to help drive economic activity, in part through the construction of new homes. But, this time around, construction, which normally leads the way out of recession, has been a drag on the economy. While overbuilding during the housing bubble bears some of the blame, so, too, does the lack of new households: when people are doubling up, there’s little demand for owning or renting. This hurts not only the construction industry but all the businesses that make the products that you put in new homes. Spending on durable goods—washing machines and the like—has been very weak over the past few years.
That’s the bad news. The good news is that when this trend reverses there will be a spike in demand, both for housing, especially rentals, and for all the stuff that you put in a house. Some pessimistic observers argue that this reversal will never happen, and that the U.S. will become more like European countries—Italy, say—where living at home until one is older is more common. But it’s easy, during a crisis, to mistake a cyclical change for a permanent one, and surveys show no evidence that young Americans are more interested in living with their parents now. Painter’s study of past recessions shows that, in the past forty years, household formation has slowed notably during downturns but has rebounded as the unemployment rate fell. It seems much more likely that the same will happen this time around than that American aspirations and social norms changed overnight in 2007.
Of course, there’s still a lot that can get in the way of recovery. High oil prices or rising rents could lead the Federal Reserve to overreact and tighten monetary policy prematurely. Europe’s troubles could spill over into the U.S. Political concerns could produce cuts in government spending. And the housing bust put the economy in such a big hole that we have a long way to go before the job market is healthy again. But if the recession was a vicious cycle—in which shrinking demand led to layoffs and wage freezes, which led to shrinking demand—we may finally be seeing the signs of a virtuous one. ♦