WASHINGTON -- A strengthening labor market and lower gasoline prices mean Americans have extra cash this Christmas. Some economists are forecasting the money will keep flowing into, and out of, consumers' pockets next year.
Household spending in 2015 will realize the type of gain typically associated with rosier economic times, according to economists including Mark Zandi. Instead of growing at the 2.2 percent average seen so far during this expansion, increases will be more in line with the 2.9 percent seen in the six years through 2007, if not the 4 percent surge during the record 10-year boom that ended in March 2001.
Unlike the recovery in stocks and home values that mostly benefited the wealthy during the first phase of this recovery, rising employment and low inflation are a boon to middle-income Americans. With expenditures accounting for almost 70 percent of the economy, outlays on items including furniture, clothing and restaurant meals will propel growth to a higher level.
"I don't think there's a single headwind for consumers; it's all tailwinds blowing at different strengths," said Zandi, chief economist for Moody's Analytics Inc. in West Chester, Pa., who projects consumer spending will grow 3.3 percent in 2015. "The expansion is truly out of the gates. We're off and running."
While most forecast purchases will strengthen, Zandi is among the most optimistic. Economists predict personal consumption will grow at a 2.8 percent annualized pace in the fourth quarter after a 2.2 percent gain in the previous three months, according to the median forecast in a Bloomberg survey taken Dec. 5-10. It will increase 2.7 percent in 2015, making it the best year since 2006, the survey showed.
For Morgan Stanley, a pickup in wages adjusted for inflation holds the key to better times.
"We don't have all our eggs in one basket anymore where we're just relying on the wealthy to drive spending," said Ellen Zentner, a senior economist at the New York-based bank. "We've seen the pace of spending among middle- and lower-income households start to pick up, and that's in reaction to the better labor market that's finally bringing the nascent signs of a pickup in wage growth."
Morgan Stanley projects spending will grow 2.8 percent in 2015.
Employers have added 2.65 million workers to payrolls this year, which is already the biggest annual gain since 1999. At 5.8 percent, the unemployment rate matches the lowest since mid-2008 and is approaching the 5.2 percent to 5.5 percent that Federal Reserve policymakers consider full employment.
The breadth of industries hiring last month was the most extensive since 1998, a sign that the benefits of the expansion are rippling through the economy, figures from the Labor Department showed.
Persistently low inflation will help wage gains look even bigger. Consumer prices fell 0.3 percent in November, the most since December 2008, the Labor Department reported this week. The retreat was led by a plunge in energy costs that continues to unfold.
That meant that weekly earnings adjusted for inflation climbed 0.9 percent on average last month, the biggest advance in six years.
The brightening pay outlook is starting to sink into Americans' psyche. Consumers forecast incomes will grow 1.8 percent over the next 12 months, the most since September 2008, according to the preliminary December report from the Thomson Reuters/University of Michigan consumer sentiment survey. Those younger than 45 years old saw enjoyed the biggest gain, the report said.
Households are already thinking of how to spend the cash. More consumers said they were likely to buy durable goods such as appliances and televisions than at any time since 2007; plans to buy automobiles matched the prior month as the strongest since 2005; and Americans were the most favorably disposed toward purchasing a house in a decade, the report showed.
Still, Tom Porcelli, the top forecaster of the monthly consumer spending figures according to data compiled by Bloomberg, remains unconvinced that the readings are about to take a decided step up thanks to nascent pay increases.
Wage gains take about a year to propel purchases, so there is little reason to get overly excited just yet, said Porcelli, chief U.S. economist at RBC Capital Markets in New York, who projects consumption will increase 2.3 percent in 2015, matching this year's advance.
"What has really changed in a dramatic enough way to get that extra lift?" he said. "The reality is, not much."
Households this year have shown a propensity to save rather than spend, and until there is concrete evidence that's changing, then consumption will keep growing modestly, he said.
The persistent drop in fuel costs is prompting other economists to tweak forecasts for the better. Analysts at Goldman Sachs in New York project the decrease in gasoline prices will be equivalent to a $100 billion to $125 billion tax cut for Americans, which will push economic growth by as much as half a percentage point next year, according to a report earlier this month.
Before the November meeting of OPEC, they had penciled in a $75 billion boost, or 0.3 percentage point. That gathering produced no agreement to cut production to prop up the market, which sent crude-oil prices tumbling further.
Goldman Sachs economists estimate consumer spending will increase 3 percent in 2015 and gross domestic product will expand 3.1 percent, which would be its best year since 2005.
Business on 12/20/2014