Consumer spending gaining ground?

Jeff Titcomb | Getty Images

Is the U.S. consumer getting stronger?

That's the claim of David Doyle, VP of North American Economics and Canadian strategy for Macquarie, who penned a 37-page note to clients this morning claiming that real consumer spending is tracking at a 4.5 percent annualized pace in the second quarter, the strongest quarterly growth rate in more than a decade.

The report, entitled "King Consumer: The $13 trillion gorilla grows stronger" points out the good news that has been lost among the gloom surrounding traditional retailers, particularly department stores: that the consumer is spending, but the growth has been concentrated in two particular sectors of the economy.

So, what's driving the spending?

Doyle identifies several key trends:

  1. Income growth from both the labor market and retirement. Aggregate income has been growing at about 4.5 percent over the past 18 to 24 months, Doyle notes. Retirement sources are an increasing part of disposable income: Doyle projects that by 2025, nearly 20 percent of disposable personal income could come from retirement sources.
  2. Household debt-to-income levels have stabilized: "The household debt to disposable income ratio has declined by over 20 percent since 2007 and has stabilized at its lowest level since 2002 ... the consumer is ready to undergo a period of modest releveraging."
  3. A housing investment cycle that suggests there is pent-up housing formation ahead. The core working age population, after several years of decline, began turning up in 2014, a positive for household demand. Second, employment is up relative to the level of housing units, suggesting "pent-up" household formation demand.

That's the good news. The bad news is that the growth has been very uneven. Over the last 18 months, Doyle notes, two sectors have accounted for almost all the growth in spending: services and e-commerce.

The shift to spending on services rather than spending on goods is critical to understanding what the consumer is doing. Doyle also notes that prices for services have been going up (inflation), whereas goods have seen a decrease in prices (deflation), further contributing to the perception that services spending is increasing vs. goods.

This increase in spending on services and goods has been great news for e-commerce companies like Amazon and shippers like FedEx and UPS. The consumers love of"experiences" and travel has also been good news for Priceline, MGM and Hilton. More retirees has been good news for drug retailers like Walgreens.

It has not been good news for retailers, particularly department stores. But everyone knows that.

Will those gains continue? There's a lot of concern that higher gas prices, or higher interest rates later this year will put a crimp in consumer spending.

Maybe, but Doyle noted to me that the share of income allocated to gasoline and interest rates is at its lowest level in decades and even less than 2007 to 2008. The consumer, in other words, is not immune to a rise in gas or interest rates, but is far more resilient.