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Car Sales on a Roll, but the Economy? Not So Much

Mark Elias | Bloomberg | Getty Images

The economy has multiple personality disorder.

The nation's auto companies are reveling in their strongest monthly sales in about five years. The housing market is rebounding. And manufacturing is not far behind.

Job growth, however, remains stuck in first gear, creating an intractable problem for the almost 12 million Americans out of work and giving companies little incentive to raise pay. Overall economic growth is feeble at best.

So why the discord?

Four years after the end of the Great Recession, U.S. car makers are on a roll. Both Ford and Chrysler Tuesday posted strong sales gains in June, as U.S. consumers continue to flock to showrooms to replace worn out clunkers and snap up higher-efficiency new models.

The ongoing pickup in housing construction and a boom in U.S. oil production also is helping car makers boost sales of light trucks. Ford posted a 13 percent overall sales gain on strong demand for its F-Series pickup truck, which had its strongest sales since 2005.

Chrysler said U.S. sales in June rose eight percent on strong demand for its two best-selling vehicles, the Ram full-size pickup truck and Jeep Grand Cherokee SUV.

Car makers and industry analysts expect the sales momentum to continue, thanks to strong pent-up demand, easier financing terms from lenders and rising consumer confidence. Overall industry sales in June are expected to show a rise of up to eight percent. They are also on track to hit levels not seen since before the financial collapse of 2008 sent sales plunging and forced Chrysler and General Motors into bankruptcy the following year.

"The fundamentals for continued industry gains in new-vehicle sales remain intact," Chrysler U.S. sales chief Reid Bigland said in a statement.

The rebound in manufacturing continues to spread beyond the auto sector. New orders for factory goods rose for a second straight month in May, the Commerce Department said Tuesday, as businesses and those consumers who have a job boost spending on everything from factory robots to new refrigerators, respectively.

Sales of household appliances and other manufacturer goods are getting a strong lift from the rebound in the housing market, which continues to show strength in many parts of the country. Overall construction spending rose a half percent in May.

Much like the pent-up demand for cars, the four-year collapse of home sales has created a backlog of demand. Low mortgage rates and improved job prospects are helping millions of new households buy their first home. Rising home prices are freeing millions of existing homeowners from their underwater mortgages.

And while the trend is up, some industry observers think the housing rebound is just getting started.

"I think we have obviously made a huge recovery in the industry," Ara Hovnanian, Hovnanian Enterprises CEO, told CNBC. "But I think we're in the early innings of the total recovery."

The latest data helps demonstrate just how much farther the industry has to go before it recoups the ground lost to the housing collapse. Builders broke ground in May on just over 900,000 housing units – less than half the 2.2 million unit pace at the peak of the housing boom in 2006.

That helps explain why, despite strong, sustained growth in sales of homes and new cars, the overall recovery remains the weakest in decades. After a strong fourth-quarter finish to 2012, gross domestic product slowed to a 1.8 percent annual pace in the first quarter.

That lackluster growth is expected to continue this summer. Based on the latest monthly data, forecasters at Barclays Research see growth in the second quarter tracking at an anemic 1.6 percent annual rate.

(Read More: Trucks Power Strongest June Auto Sales Since 2007)

The slowdown can be partly blamed on the ongoing federal budget cuts known as the sequester, which cut $85 billion worth of spending over seven months. Consumers' budgets have also been crimped by a 2 percent, budget-balancing increase in payroll taxes that took effect January 1.

But the real headwind remains a stubbornly high jobless rate, which has put a much bigger damper on consumer spending, which is the source of some 70 percent of U.S. economic growth.

Four years after the recession ended, the pace of hiring remains weaker than in any of the last half dozen recessions, even as industries like autos and housing stage a convincing rebound

Though housing starts have more than doubled from the recession's depths, the number of residential construction jobs has all but flat-lined. Even as car sales have zoomed head by nearly 75 percent from the recession trough, hiring is up only 25 percent.

With demand expanding gradually, many producers of goods and services have been squeezing more output from their existing work force. Investing in a new factory robot or handing out Blackberrys to extend workday hours is a lot cheaper than creating new a full-time job with benefits.

As long as demand continues to expand only gradually, that pace of incremental hiring is likely to continue, according to Joel Naroff, chief economist Naroff Economic Advisors

"Many businesses can essentially can meet the growing demand with limited hiring and improved productivity," he said. "That just extends out the slow growth environment, and as long as you have slow growth it takes a long time for the unemployment rate to come down."

A high jobless rate also gives companies little incentive to raise wages, said Naroff, which holds back growth in consumer spending and further feeds into the cycle of stagnation.

The current recovery has also been held back by the widespread damage to household wealth inflicted by the mortgage bust and the 2008 collapse of the financial system. More than $7 trillion in household wealth was wiped out after house and stock prices plunged; that hole has only recently been filled in.

And while that lost wealth has been recovered overall, much of it has been concentrated among the wealthiest households, leaving many other Americans with little savings and meager wage growth.

—By CNBC's John W. Schoen. Follow him on Twitter @johnwschoen.


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