Dull Strength a Hearty Sign in Economy

A lot of forecasters don't get very excited about the current economy, but part of the problem may be expectations that are out of date. They keep looking for the kind of frenzied buying that the nation has experienced in past recoveries. Not seeing it, they proclaim the recovery about over.

What they fail to recognize is that a lot of that lack of fire is nothing more than a healthy attitude on the part of consumers at all levels--from corporate purchasing agents to the average family. With inflation low, they no longer feel compelled to buy just to beat price increases.

A friend who's in the market for a new car epitomizes the picture. He didn't get around to buying in September, when the car companies were offering special cut-rate auto loans to bolster sales. Now, as badly as he wants the car, he plans to wait until they offer them again. It's the reverse psychology from what he'd likely have had several years ago.

That kind of restraint is having an impact on the department stores. Time was when prices tended to be high in the peak Christmas season. Now the off-price sale is at least as common at Christmas as at other times of the year. For many consumers, off-price is becoming the standard.

This isn't the only factor keeping the economy sluggish, of course. Among other things, the big rise in imports, combined with slow growth in exports, is a major reason. But the change in psychology has affected many industries, one being housing. Going back a few years, would-be buyers were standing in line at housing development offices to participate in lotteries for the right to buy. It made it appear housing sales and prices would go out of sight.

Banked on Inflation

In retrospect, it's clear that what was propelling housing was a lot of demand from people who saw houses not so much as shelter as a way to make a fast buck. In short, they banked on inflation.

In the end, that buying for investment left a lot of new homes standing empty. It took a while for the industry to work off the excess. Now, even though it has, demand doesn't have the same zing to it. One developer who thinks demand was 90% for investment before now figures it's 90% for shelter.

Yet housing is a good example of just how much strength there is in today's economy--dull, uninspiring strength, perhaps, but strength nonetheless.

Anthony Frank, chairman of First Nationwide Savings, observes that housing starts, though off last month, have been running along at an annual rate of 1.75 million units for the second year in a row. That's well below the 2 million of 1978 but also well above the recession lows of just over 1 million.

"It's not a barn-burner, but who wants a barn-burner," Frank says. He figures the housing industry ought to be grateful for getting itself out of its perennial feast-and-famine mode and into a period of steady, predictable activity. Predictability usually translates into more efficient, low-cost operations, and that will help keep housing prices affordable.

Behind the ho-hum statistics, however, Frank sees the first signs of renewed homeowner interest in trading up--selling a lesser house for a greater one, a key part of any real improvement in home sales.

At the same time, there's more money out there for mortgage lending than there are people wanting it. Part of that is the entry of Wall Street into the mortgage business, turning packages of mortgages into securities than can be bought and sold like stocks.

So while mortgage interest rates have tended to hang up in double-digits, there's continuing pressure on mortgage lenders to bring the rates down. Just like car buyers and department store shoppers, home buyers probably are hanging back just a bit waiting for that further drop in rates.

The problem with economic forecasting is that it is based so heavily on past experience. That experience doesn't serve the forecasters well at the moment. The economy is in a different mode, the down side of which is slow growth and not many new jobs. On the other hand, price resistance is just what's needed to keep inflation low and prolong recovery.

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