With all the hand-wringing about how weak this economic recovery has been, with the second-quarter GDP growth rate of 2.3% being hailed as a triumph, the U.S. consumer economy has quietly emerged as a real source of strength.
Automotive and housing sales have once again begun to fulfill their traditional role as twin pillars of an economic recovery. And, unlike a few years ago, average middle-class people, not just the wealthy, are buying.
Even millennials, those supposed denizens of Uber, rentals and their parents’ basements, are starting to loosen their purse strings to pursue these two key components of the American Dream.
“I don’t see anything in the immediate horizon that will derail this,” said Charles Chesbrough, senior principal economist with IHS Automotive, an analytical and consulting service based in Northfield, Mich.
He’s particularly impressed with July auto sales. General Motors reported a 6.4% year-over-year increase in U.S. retail sales, and Fiat Chrysler Automobiles and Ford Motor were only slightly behind. Nissan Motor and Honda Motor did even better.
And the hottest vehicles were some of the priciest: crossovers, SUVs and pickup trucks. Luxury marques like Lexus and Infiniti also outperformed. That means higher average prices and fatter profits for car companies.
But it also means car buyers are letting it rip, which Chesbrough attributed to lower gasoline prices and more appealing products.
As crude prices drop again amid oversupply, weak demand from emerging markets and the winding down of the summer driving season, Chesbrough estimates the average U.S. household is saving $800 to $900 a year at the pump.
“They’re using those savings from the low gas prices and they’re buying big cars, pickup trucks, SUVs,” he added.
And not just basic models. Instead, “they’re loading them up” with extras, technology and navigation packages, what have you. “Consumers really want new technology,” he said.
Also, some loosening of credit standards has broadened demand beyond the affluent. “Now it’s all buyers who are getting into the market,” he said.
Chesbrough projects 17.1 million vehicles will be sold in the U.S. this year, the most since before the financial crisis, and “by next year, we may reach a new, all-time high” above 2000’s 17.4 million record.
Housing sales are a long way from their bubble peak in 2006, when 2.1 million new and existing homes changed hands. But the recovery has been striking. Some markets that had been left for dead have come roaring back, with enormous price gains as vulture investors bought foreclosed homes in bulk.
Lately, price increases in those former boom towns have moderated, said Svenja Gudell, senior director of economic research at Seattle-based real estate marketplace Zillow.
“I think overall the recovery in housing is continuing, but we are starting to go back to more normal rates of appreciation,” she said.
Still, recent data have been strong:
Existing-home sales jumped 3.2% in June to an annual rate of 5.49 million, the highest since 2007.
New-home sales soared 18% in June, although new construction simply hasn’t recovered from the housing bust.
The Standard & Poor’s/Case-Shiller 20-city index of home prices rose 4.9% year-over-year in May.
Gudell said price increases are heavily concentrated in strong markets like San Francisco, Miami and Denver. Overall, she sees the base of buyers broadening beyond the affluent to the middle class.
“The low end is starting to pick up, but … unfortunately, conditions are extremely competitive” amid low inventory, bidding wars and all-cash sales in some markets.
Despite some short-term obstacles in both housing and cars, there’s plenty of pent-up demand.
IHS Automotive estimates that Americans have owned their vehicles for an average of 11.5 years. Sure, they’re made a lot better now, but that’s a record.
And a survey by Zillow in January found 5.2 million renters expect to buy homes this year.
Millennials, who have faced more financial constraints than previous generations, nonetheless are starting to buy cars and homes.
“One of the largest groups of new homeowners will be millennials,” said Gudell, adding that they’re buying in their 30s instead of their late 20s. Added Chesbrough: “Millennials have been coming back to the [auto] market,” although student debt may reduce their purchasing power, he cautioned.
Both see the dangers from higher interest rates, which Chesbrough calls “the one thing we know that’s coming down the pike that could have a negative impact on consumers.”
But “it’s not like rates are going to shoot up tremendously,” said Gudell. Federal Reserve Chairwoman Janet Yellen has repeatedly said that the Fed would raise rates gradually, and they likely wouldn’t go as high as they have in the past.
So, as the broad middle class and especially millennials start buying houses and cars again, this recovery could last longer than many think, and keep this bull market running well past its sell-by date too.
Written by Howard Gold of MarketWatch