The conventional view of economists has long been that consumer spending is governed predominantly by a household’s assessment of their own future real income streams. Thus, despite rising energy prices and surveys last fall that suggested sagging consumer confidence, inflation-adjusted consumer spending increased at a booming 8.0 percent annual rate over the holiday season, and now runs at about 3.2 percent ahead of a year ago.  Looking ahead, to assess the outlook for consumers’ spending, you begin with their income prospects. Expectations are that the overall labor market will continue to be strong: continued job growth, a moderate unemployment rate, and further real wage gains should lead to healthy advances in incomes and, thus, overall consumer spending.

Overall, the fundamentals appear sufficient to support continued economic expansion. Underlying productivity growth remains strong, the financial positions of households and businesses remain conducive to spending, and, if we have no further run-up in oil prices, the drag on activity from higher energy prices should diminish over time.

A decline in consumer confidence is another channel through which a correction in house prices could affect the economy. In the current situation, a sizable deceleration in house prices could have an outsized effect on consumer confidence and thereby reduce household spending by more than is implied by conventional estimates of the wealth effect.

Saving last year was probably further depressed by the rise in households' energy bills. Over the next few years, saving relative to income is likely to rise somewhat from its recent low level.

At the national level, consumer spending has been well maintained, and the fundamentals--such as income growth and household balance sheets--remain supportive.

As in 2005, consumer spending is expected to be a primary contributor to growth in 2006.  In recent months, consumer confidence measures have sharply rebounded from the hurricane-related decline last fall.  More importantly, consumer expectations of the future are positive.  One possible drag on consumption lies in the persistence of high energy prices, especially for natural gas.  High utility prices for heating are expected to constrain spending somewhat during the winter months...Overall, I expect to see consumption growth of around 3 percent for 2006.

In the immediate aftermath of Hurricane Katrina, fears were widespread that consumers might pull back sharply on spending, both in response to sharply higher retail gasoline prices and out of a general sense of heightened anxiety about potential fallout from the storm damage. Survey measures of consumer confidence, which plummeted in September, seemed to bolster this view. But the effect of the storms on consumer outlays have turned out to be far more limited than expected, exemplifying the oft-cited resilience of the U.S. economy.

Apart from auto sales, which slid following expiration of the summer’s “employee discount” promotions, retail sales have held up well and overall consumer spending has continued to advance. And on the whole, holiday spending appears to be coming in stronger than many feared a month or two ago. I would argue that this episode illustrates quite well how consumption expenditures are governed predominantly by households’ assessment of their own future income prospects, rather than by any general economic nervousness, despite how they respond to telephone pollsters. With healthy income growth ahead and a reasonably strong overall job market, the outlook for consumer spending looks good.

Of course, we normally would expect the year-and-a-half-old energy price surge to push down spending...Recent data suggest, however, that consumer spending has held up well so far.  For example, although personal consumption expenditures were up only modestly in October, they were held down by a big drop in auto sales that probably reflected reduced sales incentives; outside of autos, personal consumption expenditures were robust, despite the surge in energy prices and plummeting confidence.  Indicators of business spending and output also have held up well.  It is possible that higher energy prices have had a negative impact on consumer spending, but the drag from this factor has been offset by other stimuli to spending such as rising home prices and growth in disposable income.

I am reluctant to bet against the strength of the American consumer. But with gasoline at or near $3 a gallon recently and other energy costs such as natural gas almost doubling in the past year, consumers may face tough choices in how they allocate their spending. In the final months of 2005, consumer spending could slow a bit if caution causes households to reduce borrowing or increase the rate of savings.

It is difficult to dismiss the conclusion that a significant amount of consumption is driven by capital gains on some combination of both stocks and residences, with the latter being financed predominantly by home equity extraction. If so, leaving aside the effect of equity prices on consumption, should mortgage interest rates rise or home affordability be further stretched, home turnover and mortgage refinancing cash-outs would decline as would equity extraction and, presumably, consumption expenditure growth. The personal saving rate, accordingly, would rise. Carrying the hypothesis further, imports of consumer goods would surely decline as would those imported intermediate products that support them. And one would assume that the U.S. trade and current account deficits would shrink as well, all else being equal.

As usual, consumers will do the bulk of the new spending that generates this growth. They always do and always will. With the expansion well underway, solid job growth and rising household incomes are supporting steady growth in overall consumer spending now, and will continue to do so into the future. This ought to be true even with the regional disruption associated with this season's hurricanes and even as energy prices rise and the accumulation of home equity begins to moderate.

The housing boom will inevitably simmer down...As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures.

Historically, it has been rising real long-term interest rates that have restrained the pace of residential building and have suppressed existing home sales, high levels of which have been the major contributor to the home equity extraction that arguably has financed a noticeable share of personal consumption expenditures and home modernization outlays.

One thing about Americans is that our cars are critical to our day-to-day existence.  And they do notice when gasoline prices go up.  And it probably does curtail other forms of spending...But what they don't do is drive fewer miles.