‘Tis the Season for a Spotlight on Consumers

If you are like me, then with each passing year you get just a little bit more annoyed with "holiday drift." That is the name given to the incessant expansion of the holiday season. This year, the Christmas season got started just after Halloween, and it completely gobbled up Thanksgiving. Next year, I'm going to dress up as Santa Claus for Halloween. I will not have any need to change my clothes for two months. The only kind of candy I will expect to receive whilst trick-or-treating will be candy canes. But enough of the satire …

Another thing that annoys me about this time a year is the hyper-focus on consumer spending. Everybody wants to express an opinion about whether or not consumers are going to spend a lot during the holiday shopping season. I am going to try to avoid adding noise to all of this holiday hype. But that does not mean that the recent trends in the data that measure consumer fundamentals are not relevant.

Through the first three quarters of 2013, inflation adjusted consumer spending is up about 2 percent when compared with the previous year. This is very close to the rate of growth for the total inflation-adjusted GDP in the U.S. Consumer spending accounts for more than two thirds of the total GDP figure, so it should come as no surprise that these two trends are moving at about the same pace. The good news is that both of these trends are poised to accelerate in 2014.

Spending growth is driven by income growth. The trend in real household income growth has been negative since the year 2000. This is a long term structural problem for the U.S. economy, but in the short term the consumer fundamentals are improving. The number of jobs created in the U.S. continues to expand, and if we experience further gains in the employment data, then the income data will respond positively. The stock market, another source of wealth and income for many households, is on a tear. House prices are also rising rapidly. Both of these factors should continue to push incomes and spending higher.

Pent-up demand for many kinds of consumer goods, such as autos and appliances, is large. Access to credit is still a problem for many households, but the credit markets are starting to ease. Most households have reduced their debt burdens significantly. This will support spending growth in the future.

And despite what they say in the media, the pleasure that is derived from the holiday season has nothing to do with the percentage change in the consumer spending data when compared with the previous year.