Household Formation

Consumption in the economy is inversely affected by household size.

During an economic recession, it is well known that consumers dine out less often and eat at home more to save money.

But couples also divorce less often. The number of divorces dropped from 7.4 per 1,000 people in 2006 to 6.8 in 2009 (BW).

Young people also stay home with their parents longer. About 20 million adult children in the US live with their parents. And 7 million more people were living in multi-generational household in 2008 than were in 2000 (McCarthy).

This inadvertent increase in family cohesion is a matter of necessity and not a matter of choice. But it goes to show how recession can be a self-perpetuating downward spending spiral.

When young people move out of their parents' houses, they need to rent an apartment which must be furnished. A typical new renter spends $600 to $1900 on furniture, appliances, and other stuff related to setting up housekeeping in the first 6 months (BW). This process of household formation expands consumption by reversing the saving from the scale economy of larger households.

The same process of consumption expansion happens when divorcees must form new households.

With fewer divorces and more adult children staying home with their parents, this process of consumption expansion is reversed.