Consumer Spending May Be Looking Up for the Holiday Season and Beyond ... It's About Time

Is consumer spending finally beginning to rebound?

It definitely seems that way. And with consumers' financial condition improving to a level not seen since 1980 (see chart below), the underpinnings are in place for a strong holiday selling season and beyond.

In addition, sales of homes and autos have been a nice surprise lately, although they're both still anemic compared to historic results. That means there's lots of pent-up demand, so maybe we're headed for better days in 2013 and beyond. To which I say, it's about time.

The Once-Mighty U.S. Consumer Awakens tells the good news story:

"Americans have shown a bit more willingness to spend. But the U.S. consumer revival may have only just begun.

Retail sales have been one of the brighter spots in the economy lately. Even as businesses fret about the slowdown overseas and what might happen if Washington can't cut a deal to keep the economy from flying off the "fiscal cliff" at year-end, people have started shopping again. . . . and weekly measures show things continue to look good in October.

People have . . . stepped up purchases of what are the two biggest-ticket items most families own, cars and houses. That they have both the ability and the comfort level to buy those things says something.

There is yet a great deal of pent-up demand that has to be tapped. September was the best month for car sales since early 2008, but the level of sales—14.9 million light vehicles at an annual rate—was still a bit light in comparison with what prevailed in the 20 years before the recession. . . .

 Similarly, sales of previously owned homes in September were up 11% from a year earlier, but they were still 8% below their level in 2000, when there were 11% fewer people living in the U.S. than there are now.

Meanwhile, Americans' spending power is high. In the second quarter, according to Federal Reserve and Commerce Department figures, they devoted a combined 28.2% of their after-tax income to food, energy and financial obligations like mortgage payments and rent. That matched the fourth quarter of 1998 for the lowest share on record going back to 1980.

The reality may be even better: It looks as if incomes may be getting understated, perhaps because, as is often the case when the labor market picks up, the Labor Department undercounts the number of jobs the economy is adding. High Frequency Economics economist Jim O'Sullivan points out that while wage and salary income was 3.7% above its year-earlier level in August, the pace of federal employment-based tax receipts suggests a larger gain of 4.5%.

With the housing market finally entering recovery mode, the economy may be seeing the kind of positive feedback loop, where increases in spending lead to gains in employment and growth, that typically comes much earlier in a recovery.

Consumers have always been the spark for that. Once they get going, they will drag the rest of the economy kicking and screaming behind them."

Summing Up

Signs are pointing to a stronger level ahead for consumer spending.

With the overall U.S. economy driven by consumers who account for more than two thirds of economic activity, any sustained boost in consumer spending will be good news indeed.

Interest rates are low, housing and auto sales are picking up and other than gasoline prices, inflation is not a problem today.

In fact, the consumer's "buying power" is now stronger than at any time since 1980.

Now if energy prices begin to fall to significantly lower levels, which I believe they will, the U.S. consumer will be in an even stronger position to buy.

While happy days may not be here again, at least we can see them in the distance somewhere, and that's a good sign.

Thanks. Bob.