This Year Could Reverse the Slide for Housing and Auto Industries

(Bloomberg Opinion) -- Households held back on buying houses and cars in 2018, leaving Americans with more to spend on other goods and services. While it’s still early in 2019, it appears this year may flip that script.

The housing and auto slumps were largely a cost story. Trade wars both real and feared increased the cost of some raw materials like lumber, steel and aluminum. Both sectors are credit-sensitive, and the rise in interest rates increased the cost of buying a home or car. And home prices rose, even setting aside interest rates. Faced with these cost realities, households went on a buyer’s strike, foregoing auto purchases and staying in their current living accommodations longer than they might have otherwise.

That may have started changing over the past month. One bright spot in the recent market volatility has been cooling off long-term interest rates and the prospects of more interest rate increases in the near future. There were signs that this was starting to make an impact in the housing market last month when mortgage purchase applications spiked. Homebuilder Lennar reported earnings last week and helped kickstart a rally in housing-related stocks when the company noted that buyer traffic has picked up recently as mortgage rates declined.

There may be a similar story for the auto industry in 2019. GM stock rallied sharply on Friday as it increased its earnings forecast for 2019. The passage of time, lower interest rates, lower oil prices and a labor market that remains strong may be dulling some of the sticker shock that consumers felt in 2018.

Even though economic growth may be slower in 2019 than it was in 2018, an economy with improving housing and auto sectors may feel better for consumers than last year’s did. But as we’ve seen over the past couple weeks, investors should be on guard for negative surprises elsewhere.

If households are spending more money on housing and automobiles than they did last year, that consumption might come at the expense of something else, even in an environment of rising wage growth. Maybe that means less money to spend on the latest consumer tech gadgets, travel or apparel. Apple’s stock plunged as the company cut its revenue forecast; it could be further at risk if consumers forgo iPhone upgrades for an extra cycle. The retail sector spent last week licking its wounds as holiday sales disappointed expectations. And American Airlines stock slumped last week as its fare forecast was weaker than expected, following Delta Airlines noting less pricing power than expected.

If investors are looking for a theme to watch in 2019 away from the high-level fears about China, Trump, the Fed and when the next recession will hit, it might be in this contrast — between autos and housing on one hand and, on the other hand, everything else.

“Housing and autos up, everything else down” would represent a reversal of what we saw last year, but would make sense if interest rates stop rising and households rebalance their budgets after a surprising 2018. It would also represent a continuation of what we’ve seen for economic growth more generally throughout the decade — peaks and valleys at the industry level as some sectors get better while others get worse, somewhat above-trend overall economic growth without either the breakout or a breakdown that would cause policymakers to celebrate or panic.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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