Downsizing and Consolidation

The American household continues the path of downsizing and consolidation. Electricity usage, which hardly ever declines, has fallen 2.3% in the US since August 2008, reflecting mostly the decrease in industrial output.

Rents have been dropping, as vacancy rates rise. This is perhaps an odd finding: shouldn’t the tightening of credit mean fewer people can buy homes, channeling more demand into the rental market? Similarly, shouldn’t rising foreclosures push more people into the rental market? It seems that these forces were overwhelmed by the drop in household income caused by the recession, and the resultant tendency to live more frugally.

Some condo developers expected the baby boomer generation to consolidate and move to smaller spaces in urban centers as they retired, but because home prices fell, they haven’t really done so. They can’t sell their homes at the price they think the homes are worth. There hasn’t been a movement away from suburbs en masse (in fact, there isn’t much moving at all: moving rates are the lowest they’ve been since 1948, when the Census Bureau began tracking them) though the preference for smaller homes seems to be increasing over the last 2 years. But that is probably a counter-reaction to the excesses of enormous McMansions, with their costly heating and electricity bills.

One hot trend is the tiny home. Several home builders are bucking the trend and moving toward very small homes. Often modular or mounted on trailers, tiny homes are less than 300 sq ft. People are going small for financial reasons, but also because of concerns over the environment and the impact of consumption. Large homes seem to engender large collections of things.

How does all this saving and decreased consumption affect the economy?

Keynes called it ‘the paradox of thrift’. Though saving is good for individuals, it can be bad for society, because it moves society to an equilibrium of lower spending, which Keynes considered the driver of economic growth. Here is where I part ways with Mr Keynes. Investment is the driver of economic growth, not spending, and higher rates of savings allow us to achieve higher rates of investment. But that won’t happen until businesses clean up their balance sheets and eliminate debt. That process will require some inefficient and overleveraged firms to enter bankruptcy. The sooner they do so, the quicker they can emerge and the sooner the economy can recover.

Individuals are curtailing their spending because that seems the smart thing to do, given the circumstances. My guess is that we’ll find a silver lining in this, for even though consumption is likely to grow more slowly in the coming years, we may be taking a path that is more sustainable.