It's axiomatic that no real upturn can take hold without solid improvement in the bellwether housing and motor-vehicle industries. That's not only because they account for nearly 9% of gross domestic product, but because their growth has a strong impact on the economy's cyclical swings--far outpacing its downward and upward movements during contractions and recoveries.
Fortunately, at least one member of the wedding seems to have arrived. Single-family housing starts have been moving higher since early last year, and are now 51% above their cyclical low. With builders reporting a recent sharp rise in traffic of prospective buyers and with Washington weighing new incentives for buyers, the only apparent hurdle to a stronger housing revival is the risk that the current upsurge in mortgage rates will continue.
The outlook for cars is more problematic. Although domestic-auto sales have picked up some since mid-January, observers are less than enthusiastic. "The 6.3 million-unit sales pace in the first 20 days of February is nothing to write home about," says analyst Phillip Fricke of Prudential Securities Inc. "All the consumer-sentiment surveys show that consumers are still depressed about the employment outlook and the state of their personal finances. As long as those worries persist, it's hard to see how car sales can accelerate much."
While economist Edward Yardeni of C.J. Lawrence Inc. doesn't disagree, he argues that auto output is still headed higher. For one thing, the recent pace of domestic-car sales is actually somewhat above the current level of production. For another, dealers' inventories of domestic cars are extremely lean (chart)--far below the levels they reached during the 1981-82 recession. "That means that auto makers will have to increase output in the months ahead even if sales just stay at their current pace," he says.
The upshot, in Yardeni's view, is that cars will be making a modest positive contribution to gdp in the second quarter. And if sales strengthen, that contribution will grow, he says, "as production is raised both to keep pace with rising demand and to boost inventories."
At least one industry observer thinks a stronger surge in demand may not be far off. Jack Kirnan of Kidder, Peabody & Co. notes that both showroom traffic and dealer orders for domestic cars are up. Further, he points out that 35% of cars are at least 10 years old, all of the 45 million cars purchased from 1984 to 1986 have been paid off, car financing rates have been falling, and some $22 billion of automotive debt has been retired in the past 12 months.
"The only thing missing to spark a pickup in vehicle sales," says Kirnan, "is a turnaround in consumer sentiment."