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The most overlooked economic stat is poised for a comeback

I know our 16,000-plus subscribers read Floor Covering News, but I’ve always wondered exactly how they read this publication. Do they read it cover to cover, do they just read headlines, or do they simply read the features that most interest them?

Those readers who do not peruse every article may have missed something in our last issue (Feb. 4/11) in which they should be most interested. I’m referring to our coverage of the Shaw Flooring Network convention. I accept the possibility that those who are not part of SFN glanced over the article. But there was something there that every single person in our industry needs to understand.

While the article focused primarily on the value the group provides its members, a very important sidelight was the comments made by CEO Vance Bell about the pending economic recovery, specifically how household formations would be driving our industry, not only this year but for years to come. It was cold, hard evidence that you’ll be riding a wave for quite some time.

For those of you not familiar with household formations, let me break it down into its simplest form. Household means a group of people living together. It can be six roommates, a four-person nuclear family plus a grandmother in the guest room, or a young couple of two. Formation means one or more of those categories. More formations is good news. It suggests more people are getting jobs, getting apartments, getting married, having kids and (in all likelihood) spending more money to furnish their new households. Flooring is a big part of that.

Household formations averaged about 1.2 million a year, but that number dropped to 500,000 in 2011. That, in and of itself, is one of the primary reasons why our industry felt hardship. Household formations are now back up to 1.1 million and projections are for them to be about 1.4 million for the rest of the decade.

Fact: Household formation is one of the best indicators of economic health. In 2007, the number went horizontal, clearly diverging from our two-decade growth trend. Why? Real wages for the Millennial generation (the kids after generation Y) have declined outright since 2007. As a result, one in three older teens and 20-somethings reported moving back in with their parents. That means they weren’t starting new households. They weren’t paying rent, taking out mortgages, buying floor covering, paying separate utility bills—all of which fall under the Housing category, and that accounts for nearly a fifth of the GDP.

Consider Florida, our fourth-largest state economy and perhaps the worst hit by the housing crash. In 2006, half of Floridian young adults (aged 25 to 34) had their own places, according to Credit Suisse. Five years later, 20% of that group moved in with their parents or were living with somebody else. That’s an astounding demographic shock to a real-estate-centric economy.

But the good news is that this statistic is changing. Household formation is projected to pick up for one simple reason: an improving economy is bound to encourage young people to get out, buy apartments and get married, eventually. How fast they start gobbling up apartments and houses is unclear. But Credit Suisse makes three projections: no recovery (unlikely), strong recovery (possible) and consensus recovery (plausible). Basically, a strong household recovery would coincide with a residential investment boom that took us to 2005 highs.

Housing isn’t going to snap back to its pre-bubble peak in the next year, but even normal growth in residential investment would be huge. If residential investment simply returns to its long-term average (going back to the 1990s), “it would add 1.7 percentage points to overall growth in the coming year,” Neil Irwin reported for the Washington Post, which would put overall growth in the coming year at about 3.2%—almost twice as strong as economic growth in 2011.

Housing is the key. And it all starts with formation.