Millennials Face High Student Loan Debt & Expensive Housing

Millennials - Weak Wage Growth Coming?

The December jobs report blew away expectations and provided fuel for the massive quick rally off the lows in late December.

There’s no question that the labor market is strong because jobless claims are low and the previous two months were revised to show more jobs were created. The biggest worry is if this high rate of job creation is going to continue into 2019. I wouldn’t be surprised to see less jobs created. But I still think over 150,000 jobs will be created on average in the first half of 2019.

Wage growth will likely slow in January after the monster December report. Average hourly earnings growth was 0.402% month over month which is the fastest growth rate since September 2017.

As you can see from the chart below, since March 2010, only 4 months had faster hourly wage growth. Every single month following those high growth months had negative monthly growth. The only hope for positive growth is the December reading being negatively revised.

In January 2018, year over year average hourly wage growth went from 2.66% to 2.77%. This means the comparisons will be slightly tougher. I wouldn’t be surprised to see a slight decline in year over year growth rate in January 2019.

Millennials - Changing Demographics

Demographics are important to review because they give you a broad based view of economic trends which you would miss if you’re only focused on microeconomics and individual companies.

One of the biggest demographic trends is the decline of births in many developed countries. China faces this problem which is why it changed to a 2 child policy in 2016. Births are still down in China which is why some estimate that China’s population will peak in 8 years.

Millennials Live At Home

Moving back to America, one of the most unfortunate trends is that millennials are living with their parents longer than ever.

Obviously, there’s nothing wrong with this if it’s a choice. I say it’s unfortunate because for many it’s not a choice. High student loan debt and expensive housing makes living with parents the only option for many millennials.

If you have high student loan debt, it makes sense to stay with your parents to pay off the debt quickly. If payments above the minimum aren’t made, debtors could wind up paying their loans for 15 years or longer. The longer the debt is stretched out, the more interest is compounded.

As you can see in the chart below, the percentage of female and male adults ages 25-34 living with their parents has exploded this cycle.

We don’t have all the data from 1960 to 1984, but we have enough to know that the percentages were much lower.

When combining this data with the movement in markets in 2018, we can determine the rise in interest rates hurt new borrowers of student loans and those with adjustable rate loans.

Lately interest rates have fallen back down. If interest rates move higher again, it could inflame the student loan crisis. The 90+ day delinquency rate on student loans at the end of this long expansion is already near the peak default rate of credit card loans in the last recession and higher than the mortgage default rate.

Specifically, the current student loan delinquency rate is 11.5%. The credit card delinquency rate peaked at 13.7% in 2010. The mortgage delinquency rate peaked at 8.9% in 2010.

Millennials - A spike higher in the student loan delinquency rate would be devastating. 

Higher rates would prevent people from going to college. That could be a good thing if tuition prices are lowered by administrators taking a pay cut.

The big difference between the student loan bubble and the housing bubble is that student borrowers are feeling the debt burden as prices move higher, while home buyers were making money by speculating in housing. You can’t sell a degree, so you can’t make money off it in the short term.

As I mentioned, the big profiteers off the student loan bubble are administrators.

Millennials - Declining Birth Rate & Millennials Head Of Households

It’s tough to say if expensive housing and student loan debt are causing millennials to have fewer kids or if the wealth of developed nations generally leads to fewer kids being born.

Society is much different than a few decades ago. Now women are working more, young adults live at home more, and the cost of raising kids has increased because of high tuition rates.

At the same time, much poorer developing nations, particularly in Africa, have more kids. Because current millennials have lived with their parents longer, they expect to raise their kids into their 20s.

Maybe if generation Xers and baby boomers knew their young adults would stay with them this long and that college would be this expensive, they would have had less kids.

The chart below depicts the decline in the fertility rate and the decline in heads of households ages 25-34. In 2017, the fewest babies were born since 1987.

Furthermore, the fertility drop was the largest since 2010. The fertility rate normally doesn’t drop sharply when the economy is strong like it is now. After the 2008 financial crisis, everything changed.

The decline in the birth rate means future economic growth will be constrained unless the country opens itself up to more immigration. When reviewing the long term prospects of individual firms, keep this dynamic in mind.

Millennials - Conclusion

Because of the high monthly average hourly wage growth in December and the tougher yearly comparison, wage growth might look weaker in January. I wouldn’t be surprised if the overall report shows fewer jobs created than December because 300,000+ isn’t sustainable.

Demographics are changing. Fewer babies are being born, millennials are living with their parents longer, and fewer millennials are heads of households.

In the long run economic growth will suffer. Any businesses that cater to babies will suffer. The student debt bubble is partially responsible for this demographic change. It may come to a flux if interest rates regain last year’s uptrend.

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