Economy: Are We On The Brink Of A New Consumption Boom?

(Drivebycuriosity) - It looks like that the US will get a new consumption boom. Really! There is a combination of factors which are very favorable for consumption and should foster consumer spending in the coming months.

Last week we learned that the retail sales grew faster in January and advanced 0.2% (even that a snow storm covered the US North East - including New York - for 2 days). They climbed ex-gasoline 0.4% (revenues at gasoline stations fell by 3.1% in the month thanks to the dropping gas prices) and increased by 4.5% from January 2015 (first chart below calculate).

 I think that this acceleration will continue in the coming months. The growth rate of the retail sales could climb to a range between plus 6% and 10% like in the 1990s and 2006.

My assumption is based on 3 observations:

1. Consumers are benefitting from sharply lower commodity prices. Cheaper gasoline, heating oil & natural gas are working like a tax cut. The average gas price at US pumps is now about 25% below the same time last year and around 50% lower than February 2014 (fuelgaugereport). Natural gas costs about halve the price it had cost in winter 2013/0214. It seems that the positive impulse from falling oil prices on the financial markets (futures for Crude & Brent Crude) is working through the system and begins to foster the economy (I explained that here driveby).

2. Consumption is also getting tailwinds from a solid labor market (charts above). Last year the US economy created 2.6 million new jobs and the growth rate of the hourly wages accelerated to plus 0.5% in January. Hourly average wages climbed 2.5% in the recent 12 months. Unemployment rate dropped to 4.9% and the weekly jobless claims are close to a 40-years low. So, Americans are earning more income and their risk to lose the job is shrinking (thanks to dropping unemployment rate & lower weekly jobless claims which signal a tighter job market).

3. Interest rates are close to zero translating into cheaper mortgases and consumer credits - and will stay favorable for a while - even if the Fed hikes interest rates this year modestly.

I believe that these factors are all working together and are amplifying each other. Rising consumer spending should encourage companies to hire more and to pay better wages (to get employees) which should foster economic growth in 2016 and beyond.