-By Dr. Carl Steidtmann, Chief Economist and Director, Consumer Business, Deloitte Research

“Rumors of my death have been greatly exaggerated.”
– Mark Twain

Twain was not the only one to witness a premature obituary. The same could be said for American consumers. Long given up as a lost cause, the consumer is poised for an unexpected comeback. Despite declining employment, the household sector is better positioned to increase spending now than at any time in the past two years.

The ultimate driver of consumer spending is household cash flow. While a great deal of emphasis is placed on employment, there are several other critically important sources of household cash flow that are often what kick-start a consumer recovery.

Purchasing power: Falling energy prices get all of the attention, but they are not the only prices that are falling. Go to a mall or a food store today, and everything seems like it’s on sale. Gasoline prices have fallen roughly $2 a gallon from their year-ago levels. Every penny decline in the price of gas gives consumers an additional $1 billion in purchasing power. In recent months, we have seen declines in prices for women’s apparel, meat, fruits, vegetables and dairy products. The decline in prices has translated into a significant increase in consumer purchasing power. Despite a weak labor market, real hourly earnings by workers has risen nearly 9 percent since last summer, more than offsetting the 3.1 percent decline in employment over the same period of time.

Falling home costs: Home prices have been falling for two years. The decline is beginning to work its way into lower rents and, for those who are buying homes now, lower mortgage payments. The boom in home mortgage refinancing is bringing down mortgage payments for many existing homeowners. The average refinanced mortgage is cutting mortgage payments by 20 percent. Even the foreclosure boom has a hidden silver lining, allowing those who go through this painful process to forego making home mortgage payments.

Tax refunds: For many households, tax withholding is a form of stealth savings. That is more the case this year than ever. Tax refunds by the middle of April have totaled $225 billion, up 15.8 percent from a year ago, giving households an extra cash flow boost.

Tax cuts: A critical element of this year’s $787 American Recovery and Reconstruction Bill was tax cuts for households that went into effect the first of April. At $275 billion over the next two years, this is the largest single reduction in taxation in the nation’s history.

Savings: It has not happened often, but households have aggressively increased their level of savings over the past year. The consumer savings rate has gone from essentially nothing up to 4.5 percent. Another similar increase seems unlikely. A decline from current levels seems more probable. A decline of just 1 percent to 3.5 percent would add another $100 billion to consumer spending.

U.S. Savings Rate, Three Month Moving Average

As a Percentage of Disposable Income

Source: U.S. Bureau of Economic Analysis

The mood of the consumer has long pitched between the extremes of hedonism and puritanism. Recessions tend to bring out the consumer’s inner puritan. Chastised for past excesses, the inner puritan tells the consumer that they have spent too much and saved too little. Last fall, the consumer’s inner puritan was out in force. The unprecedented volatility in the financial markets, coupled with severe problems at several of the nation’s leading industrial companies, left the consumer shellshocked. The decline in retail spending was sharper than anything experienced in the post-World War II era.

Now retailers have these past declines coming up as easy comparables. With so much pent-up purchasing power from falling prices, tax refunds and cuts, mortgage refinancing, and savings, do not be surprised to see the consumer coming back strong this summer.

Recoveries bring back the hedonist in the consumer, like a partyer returning to Mardi Gras. For retailers, that should make the coming selling environment much improved over the experiences of the past year.