What may unlock consumer spending

D. William Kohli, Michael V. Salm, and Paul D. Scanlon, CFA
Co-Heads of Fixed Income, 05/07/15

Over the past year or so, rising wages among lower-income workers raised expectations that consumption would show new signs of strength. In addition, lower gas prices — which at current levels add, according to some estimates, roughly $1,500 per year to the disposable income of the average U.S. family of four — were expected to boost consumers’ ability and willingness to spend.

But consumers appear to be saving their money. The question is: What are they saving for?

While retail sales have been rather weak, goods are only one part of the consumer spending basket.

Households also spend on services, and key parts of spending on services — such as housing — are growing quite steadily now.

New home sales have moved up

Existing home sales show strength

While steady growth is not booming growth, housing data are tolerably strong almost everywhere in the United States, and the recent rise in the household formation rate is pushing up spending on housing.

The number of households is rising

Thus, if consumers appear to be missing, it may well be that they are busy planning a future home purchase — or, at least, moving out of a multifamily home and into a new rental. Future buyers and renters have the potential to push up aggregate housing demand.