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By Jeremy Glaser and Robert Johnson, CFA | 10-22-2014 11:00 AM

5 Tailwinds to Consumer Spending

Lower gas prices, an improving job market, and other factors should spur consumers to open their wallets, says Morningstar's Bob Johnson.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Will consumer spending start to pick up again? I'm here with Bob Johnson--he is our director of economic analysis--for his take on the state of the consumer. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: As we are approaching the holiday season and we're wondering what consumer spending is going to look like in the fourth quarter, what are some of the factors that you're looking at to determine the strength of the consumer right now?

Johnson: Well, there are four or five factors that I believe are really important that are going to help the consumer in the fourth quarter and make for a very good holiday season. I think the National Association of Retailers is thinking sales over the holidays may get up to 4.1%--that would be the best number since 2011.

So, let's go over some of those reasons why the economy might do better. First, let's start with gasoline prices. Gasoline prices are down from about $3.70 a gallon earlier in the year all the way to $3.08 on average today across the U.S. And looking at crude-oil prices, it looks like there may be even more room for that gasoline price to fall, potentially under $3, in just the next couple of weeks ahead.

Glaser: Defying expectation, interest rates keep coming down. Do you think that will support spending?

Johnson: I think it absolutely will and the primary mechanism there is probably in the housing market. I think housing had stalled out a little bit because of affordability issues, and now we've seen home price stop accelerating so quickly. And now, we've got interest rates actually coming into a point where they are going to be lower. I think that's a big help for the housing market and, of course, the housing market has a big knock-on effect of furniture, mortgages, moving--all sorts of different things that are very positive for the economy. So, lower interest rates are certainly a big help.

Glaser: One of the big worries, though, has been stagnant wage growth and the jobs market. Do you think the [economic] recovery and the jobs recovery we have right now is enough to support more spending?

Johnson: I think the jobs market is actually something I'm looking forward to helping the fourth-quarter and 2015 numbers. We've now got the unemployment initial claims down to its lowest level since 2001, and that's usually a pretty good harbinger of what's coming in employment. And we've certainly seen the employment numbers look relatively good lately, a slightly accelerating trend. That should put more money in the consumers' pockets. And I've got this ongoing thesis that has yet to fully identify itself, which is that we're going to have a labor-market scarcity in higher wages. And I think we've certainly seen some of the scarcity show up, but the higher wages have not just yet, and I expect to see those over the next six to nine months.

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