How much credit can you give the recovery?

• Position: Economic Outlook

In this quarter's forecast, Gary Shoesmith, associate professor at the Babcock Graduate School of Management at Wake Forest University, anticipates that the recovery will gather speed.

BNC: Is the economy finally showing signs of life?

Over the past seven quarters it has been clear that the recovery was lousy and was going to continue to be lousy for some time. Now there are early signs that that long period is about to come to an end and that more rapid expansion should be forthcoming in the next two to three quarters.

BNC: What has changed?

Since 1990, consumers have worked diligently at reducing their outstanding credit. But over the last two quarters there's been a hesitation on the part of consumers to drive down their debt. We're looking at the TABULAR DATA OMITTED possibility that, despite their already relatively high levels of debt, consumers will start expanding credit much faster than income, which is what consumers typically do in the expansionary phase of the cycle.

If consumers indeed believe that their jobs are more secure and that the time is right to use credit, we're going to see a much faster recovery very soon.

BNC: How are consumers using their credit?

Auto sales took a sharp jump in the second quarter and appeared to be increasing in the third quarter. Auto sales and housing starts have been the two missing ingredients in this recovery. Typically, they are leading sectors in a recovery, but we have managed to forge a modest recovery since 1991 without these two sectors. If auto sales do indeed turn around, we are looking at the beginning of what is typically early recovery behavior.

I'm confident the increase in auto sales will be sustained because the average age of autos in the United States, well over 6 years, is much older than is typical in the beginning of a recovery. Given consumers' doubts about their job security and income, many will postpone purchasing another car, but eventually their cars will be replaced.

BNC: What's happening with housing?

Housing starts began to move upward in early 1991 prior to the end of the recession, taking a leading role as in other recoveries. But then they flattened out in late 1991 through 1992 into 1993 and really haven't made any contribution to...