As Recession Fades, Americans Head to the Mall

It has long been a truism among economic forecasters: Never underestimate the willingness of Americans to spend. Year in and year out, in good times and bad, consumer spending somehow always managed to keep rising. Until the Great Recession hit, that is. Spending fell in real, inflation-adjusted terms in 2008 for the first time in 28 years, dropping by 0.2%. Outlays then declined a further 0.6% in 2009, the first back-to-back slump since the 1930s.

It took a series of aggressive government moves—from middle-class tax cuts to the cash-for-clunkers automobile trade-in plan—to get Americans shopping again. The result: Consumer spending rose in February for the fifth straight month, jumping by 3.4% from a year earlier. The key question facing the economy for the rest of this year is whether these gains will continue.

A growing number of economists and retailers think they will. Department store Saks (SKS) is "moving from defense to offense," selectively rebuilding inventory and increasing investment as consumers "come out of their shell," says CEO Stephen Sadove.

Behind the budding optimism: pent-up consumer demand, higher incomes and wealth, and a more generous supply of credit from banks. Put it all together and it looks like the rise in spending is sustainable, says Michael Niemira, chief economist for the International Council of Shopping Centers in New York.

As evidence of what Niemira calls the "large reservoir" of catch-up demand, automakers sold only 10.4 million vehicles in the U.S. last year. That was down 21% from 2008 and well below the 14 million that President Barack Obama's economic adviser, Lawrence Summers, reckons is needed each year to replace scrapped vehicles and to take into account population growth.

Consumers are better positioned to satisfy their cravings as incomes rise in tandem with the economy. Wages and salaries increased 0.8% in the six months through February after falling 4.9% in the previous 12 months. And if the job market finally picks up—as many economists now expect—that will add to household spending power.

As the stock market surges, with the Standard & Poor's 500-stock index up more than 70% from its March 2009 low, upper-income Americans are reacquiring the means and confidence to spend again. Household net worth rose 11.8%, to $54.2 trillion, in the fourth quarter of last year from $48.5 trillion in the first quarter of 2009.

The rise in wealth means those who are better off can afford to save a bit less. The household savings rate fell to its lowest level in more than a year in February. But at 3.1%, it was still well above the 1.7% monthly average in 2007, before the recession began.

Banks are also loosening up on credit after seeing their profits rise. A net 9.6% of banks surveyed by the Federal Reserve in January reported an increased willingness to make installment loans to consumers, the first positive reading since 2007.

Americans undoubtedly still have way too much debt. Yet they have managed to reduce it—the first time they've done so on a sustained basis in more than 50 years. Household liabilities fell to $14 trillion in the fourth quarter of 2009 from a record $14.5 trillion in the third quarter of 2008.

Some of that drop probably came from financially strapped homeowners losing their properties to foreclosure. Yet whatever the reason, it frees up money to be spent elsewhere. The share of income households must devote to debt payments declined to 12.6% in the fourth quarter, the lowest since 2000.

That's not to say consumers are about to return to their free-spending ways. The deepest recession since the Great Depression has left enough of a scar on the American psyche to keep that from happening.

But conditions seem to be falling into place for what Chris Varvares, president of Macroeconomic Advisers, calls "solid, if unspectacular consumer spending growth this year near 3%." After two dismal years, that's something to be welcomed.

    Before it's here, it's on the Bloomberg Terminal.