What’s Plaguing Auto and Housing Stocks Isn’t Contagious
(Bloomberg Opinion) -- Don’t let the underperformance of the housing and auto sectors get you down. Last week the stocks of Ford, General Motors and multiple homebuilders hit 52-week lows, but those industries don’t pose much risk to overall economic growth. In fact they may help.
Housing construction and automobile spending have made up a fairly stable percentage of economic activity over time. Going back to 1960, residential fixed investment and consumer spending on motor vehicles and parts has added up to 6 to 10 percent of GDP. Four of the five major recessions we’ve had since 1973 have started when those two sectors were near the top of the range of this chart and were headed down. The only outlier was the technology bust in 2001.
What’s notable is how much housing and auto activity crashed after the great recession, and how slow they have been to normalize. They now combine to around 6.5 percent of GDP. Maybe even more surprising is how, in the first and second quarters of this year, they have failed to grow their share of GDP on a year-over-year basis despite strong overall economic growth and booming consumer confidence. What gives?
Housing’s struggles have become increasingly well-documented. Affordability is a problem now, because so few homes were built in the years after the great recession and because so many millennial households are looking to buy homes. Land and labor costs have become prohibitive across the country. Rising interest rates are starting to bite.
It doesn’t help that young households seem to be self-sorting more and more into the country’s largest metro areas, particularly in the South and the West, because that’s where the jobs are. Zoning restrictions in high-cost metro areas limit construction of new homes.
Because land and labor were limited, in the early years of the recovery most of the housing that was built was higher-end, but lately that segment of the market appears to have become somewhat saturated. As a result, homebuilders are starting to move down-market. That may be a short-term drag on the sector’s earnings and contribution to economic activity, but it should provide a more stable foundation for growth in 2019.
The big factor hurting the auto sector this year has been rising costs for steel and aluminum resulting directly from the Trump administration’s tariffs and indirectly from lingering concerns about the viability of global supply chains if the trade war continues to escalate. Additionally, higher interest rates are impacting the ability of consumers to finance purchases.
If autos and housing remain important to the economy, and the stock prices of companies in the sectors suggest struggles, should we be worried about a recession? The answer appears to be no. Housing’s problem is a mismatch between inventory and demand; at lower price points there will be plenty of demand, and homebuilders are already adjusting. And as long as the labor market and consumer confidence remain strong, auto demand should at least remain steady, given the tight relationship between employment and auto sales.
A mild retrenchment in the auto and housing sectors represents not a risk but an opportunity. After this period of adjustment, they could give U.S. economic growth a solid boost.
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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