(FORTUNE Magazine) – That nerve-racking sound emanating from the U.S. homebuilding industry earlier this year wasn't the busy clatter of hammering and the whine of circular saws--it was the figurative sound of an economic expansion splintering apart. Construction spending on single-family homes, reeling from last year's spike in interest rates, plummeted at a 28% annual rate in the second quarter, a major reason that overall eco nomic growth ground to a virtual halt. But with interest rates down, many economists have begun to glimpse a nascent recovery in housing--a recovery crucial to the consensus forecast that the economy will stay out of recession now, later this year, and probably even in 1996.

Housing will be carrying a heavy burden, especially if auto sales continue to be weak and employment growth remains feeble. But economists who see a rebound feel their forecast is nailed down tight. Why? Housing historically has played the starring role in reviving moribund economies. "Interest-rate-sensitive sectors--especially housing--will lead this upturn," predicts David Berson, chief economist at Fannie Mae, the nation's largest provider of mortgage money. Everyone but the bond market (which fears strong growth because it can lead to inflation) should be rolling out the welcome mat as the force that hurt the economy in the first half of 1995 starts helping in the second. Construction jobs will increase, furniture and appliance sales will rise, carpenters and electricians will get more remodeling jobs, real estate agents will get more commissions--you get the idea. It's a big industry that makes big ripples in the economy.

But don't expect the housing recovery to turn into a boom. Employment and income growth are just too tepid, says Berson, for the housing market to climb back to last year's strong level of sales and starts. Dan Mercer, a researcher at the National Association of Home Builders, notes that pent-up demand has dissipated as sales have risen in recent years.

Nevertheless, signs of momentum in the housing market are building. The most hopeful is the recent jump in new-home sales--up an impressive 12% in May and another 6% in June. "In one word, business is good. In two words, it's very good," says Tim Eller, president of the homebuilding group at Centex Corp., the largest builder of single-family houses in the U.S. The company's second-quarter financials don't reflect that op timism--revenues and earnings both fell sharply. But a 14% rise in unit orders clearly signals a turnaround.

Centex isn't unique. Surveys by the National Association of Home Builders show a significant rebound in customer traffic and other market conditions in recent months. And though long-term interest rates have ticked up of late, fixed-rate 30-year mortgages are still highly attractive at about 7.8%, vs. 9.25% last December. That enticing decline has caught the attention of consumers, whose homebuying attitudes improved sharp ly in July, according to a University of Michigan survey. They have now regained all the ground lost during the past year.

The pickup in sales has shrunk the bloated inventory of unsold houses, clearing the way for new construction. Though spending on single-family home construction may still be soft in the current quarter, economists at Laurence H. Meyer & Associates expect it to grow at an 8% annual rate in both the fourth quarter and in the first half of 1996, far faster than the overall economy. Wall Street analysts and investors are also betting on an upturn. Standard & Poor's index of homebuilding stocks climbed a roof-raising 17% in the second quarter, double the overall market's gain. That's a big vote of confidence in the future, since homebuilders' profits--witness Centex--were turning to sawdust.

Such ebullience spooks the bond market. "Above-potential [economic] growth could quickly rekindle fears of higher inflation," leading to higher interest rates, warns BCA ForeTrends, an analytical service that's been telling its institutional clients to pare down their bond holdings. A chief worry, says BCA, is the housing recovery. Indeed, immediately after the August 2 report of June's robust home sales, traders took bond prices down a sharp half point, pushing interest rates up. If these so-called bond market vigilantes become convinced that an accelerating housing market will stir up inflation, they could force interest rates high enough to squash the homebuilding business and even bring on recession. So by all means, expect to hear the happy sounds of homebuilding the rest of this year. Just hope they don't get too loud.

WHY BABY-BOOMERS WON'T BE ABLE TO RETIRE

Thirty- and forty-somethings drifting into thriftless middle age should take a cautionary lesson from their elders over age 50. According to a new study by the Rand Corp., the public-policy research outfit based in Santa Monica, California, most Americans who have already retired or will do so soon have done at best an adequate job of saving enough to assure their long-term economic security--and then only if Medicare, Social Security, and their private pensions continue to deliver at or near present levels. As for people in their 30s and 40s, unless they dramatically lift their savings, warns Rand senior economist James Smith, "most won't be able to afford to retire."

Rand found the total assets of the median household nearing retirement to be just $99,350, as the chart shows. By itself, that's barely enough to support a retired couple for three years at their current living standards, even though most people in advanced middle age can expect to live into their late 70s. Put another way, it would only generate annual income of about $7,000 if invested in Treasury bonds today. You have to go all the way up to the 90th percentile to find people with respectable nest eggs.

Why don't people save more? High levels of divorce and the growing prevalence of single-parent households play a big role. The median wealth of married couples in the 51 to 61 age band, at $132,200, is nearly four times that of those who divorced or never married. And the healthy are more likely to be wealthy. The $360,000 average wealth of hale and hearty fifty-somethings, Rand reports, is more than four times that of their sickly contemporaries. Government goodies like Social Security and Medicare generally discourage saving, the report finds.

While the current generation of near-retirees will most likely be spared the impoverished old age that their inadequate private savings would otherwise guarantee, baby-boomers won't be so lucky. On its present trajectory, Social Security will be unable to sustain today's benefit levels by the time the boomers shuffle off to shuffleboard. Far fewer younger workers, too, can count on receiving company-paid pension benefits, since employers are increasingly leaving their employees to assume responsibility for their own retirements.

Smith's prescription: Congress must abandon the fiction that Social Security can remain untouched as the budget deficit is cut. Says he: "Today's benefits structure is seriously out of whack, and nothing short of a thorough restructuring will do." To boost private wealth creation, Smith urges a shift to a consumption-based tax system that would exempt saving.

- Louis S. Richman