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Is the American Consumer Back?

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Updated

Weak price of oil at play in consumption data

Elsewhere, as I wrote last month, US consumption is likely stronger than headline figures suggest, when you consider that much recent weakness is a result of falling oil prices and the dynamic of new technologies’ downward influence on price.

Is the American consumer back

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Market Realist: A sign of good things to come

Personal consumption in the US jumped by 0.9% in May over the previous month, following a gain of only 0.1% in April. It’s the biggest increase since August 2009—a sign of stronger economic growth ahead.

Until recently, lower oil (USO) prices and a robust job market didn’t lead to greater consumer spending. Instead, the American consumer ramped up their savings and serviced their debts. While individual financial situations have improved, this trend has limited the ability of the overall economy, which relies mostly on consumer activity, to grow at a faster pace. Remember, consumption makes up ~70% of the US GDP. Consumption-related sectors (XLY)(XLP) are set to gain from this rise.

American consumer back

Low interest rates have been a boon for most families. Home affordability is nearing a multi-decade high. The new home sales figure hit a seven-year high in May, when 546,000 new homes were sold. As the graph above shows, new home (IYR)(VNQ) sales have risen over the last 12 months.

The recent retail sales figures also show that consumption patterns are improving. While retail sales fell in the three months between December 2014 and February 2015, retail sales have risen since. Retail (XRT) sales grew at 1.5%, 0.2%, and 1.2%, respectively, in March, April, and May.

An improving labor market, coupled with rapidly increasing consumption levels, bodes well for the economy.

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