Tuesday, November 13, 2007

Housing and Autos

Be Your Own Economist ®

The Lehmann Letter ©

November 13, 2007

Housing and Autos

This morning’s Wall Street Journal lead article on the mortgage debacle, http://online.wsj.com/article/SB119491821278890759.html?mod=todays_us_page_one, is another reminder of one of the key problems facing the American economy. But, many may ask, if residential construction is in such a bad way, why isn’t the economy suffering from the decline in building activity?

The following charts from www.beyourowneconomist.com (click on Seminars and then Charts) illustrate one reason housing’s impact has been muted.

Housing Starts

Auto Sales
In the past housing starts and auto sales usually fell together, leading to recession. The economy suffered from the twin impacts of the decline in both sectors and the consequential decline in the clusters of industries dependant upon them. Lumber and other building materials, heating and cooling equipment, home appliances, furniture and furnishings, rubber tires and fuzzy dice were all pulled down by the slumps in building and autos. They fell apace in response to a decline in consumer sentiment stemming from a surge in inflation and interest rates.

This time we’ve had no inflationary surge and interest rates have risen moderately. Housing’s downfall stems primarily from the speculative binge fueled by easy credit following the 2001 recession. Auto sales have remained immune from housing’s hard times and that has helped keep the economy afloat. If autos should follow residential construction into the trough, the overall economy would be in peril too. What might instigate that? If mortgage refinancing has sustained auto sales, and that source of credit is withering, that could be a problem for auto sales and the overall economy.

Stay tuned.

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