Consumption Poised to Pick Up

Bob Johnson: Consumption is a key driver of U.S. GDP, representing about 70% of the total. Since 2000, consumption growth has averaged around 2.2%. Now, looking more specifically at this recovery since 2010, we can see that we've ranged from about 0% to as high as about 3.4%.

Now, let's take this apart a little bit. You can see in the early years of the recovery we had a dramatic bounce in consumption and got all the way up to 3% consumption growth in 2011. However, consumption then peaked out as some of the stimulus measures and tax credits began to disappear from the data and as high prices related to energy and crops raised inflation and slowed consumer spending. And in fact, weather piled on and brought the rate down and kept it low all the way through 2013. Then as inflation began to drop and incomes began to improve, consumption again spiked and went to as high as 3.4%.

Looking ahead, we can see that we've dropped back a little bit right now to 2.8%, but the prognosis is excellent. What is the key item that we use to forecast consumption? We look at wages and we look at real disposable income. We are now overlaying those growth rates on top of consumption and you can see they usually track pretty close with the exception of a period when some tax credits distorted the numbers, but generally they track very closely. And right now, both wages and real disposable personal income are exceeding consumption, suggesting better news for the consumer in the months ahead.