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It's been a tough slog for most Americans, but 2013 could be a breakout year. Despite the end of the payroll tax holiday, which will slice two percent off of the average person’s disposable income, consumer spending is expected to grow in the years ahead. And already, markets have taken note, with the S&P 500 and Dow rising three percent since the beginning of the year.

If the consumer, which is 71% of GDP, can bounce back in 2013, this will provide the necessary loft to shift the U.S. economy into high gear. With residential construction and business investment expected to punch above their weight in 2013, a consumer comeback this year could propel the U.S. to 2.4% growth in 2013 and more than 3.3% in 2014. And a consumer comeback will be the key, since business investment and residential construction account for just 13 percent of U.S. GDP.

During the 2008/2009 financial crisis personal spending tumbled by 3.4% the sharpest drop in the past eleven downturns. Not only that, but the up tick in consumption since the recession ended was the weakest pace of the past eleven recoveries. Although the recent fiscal-cliff deal managed to avert two-thirds of the personal tax increases that were schedule to take effect on January 1 st, higher payroll taxes on the top-income households is expected to drain about $160 billion, or 1.3%, from disposable income in 2013. But despite the challenges, consumption is expected to clock in at a moderately strong 3% in the second half of the year.

The household debt-to-income ratio has turned from sickly to healthy over the last five years, with consumers digging out from a mountain of debt and with ratios not seen since the mid-nineties. Consumer credit is now once again expanding, albeit slowly, supported by auto financing and easier lending standards after collapsing by more than 15% in the financial crisis.

Spurring consumption is the budding housing recovery, with home sales driving the demand for home furnishings, as anyone knows who has had the joy of lugging furniture past its best-before-date to a new place. Rising house prices also boost consumer confidence and spur bank lending.

Improved household finances, continued low interest rates coupled with plenty of pent-up demand should help propel consumption higher in 2013. After a 40-year climb, the consumers' share of GDP stopped rising during the credit crisis, but could head north again with low interest rates. Car sales picked up notably in November—and no wonder, as the average vehicle age is a record 10.8 years.

The wealth effect that once hobbled consumption has become virtuous once more with higher house prices and a near doubling in stock markets helping households to recover four-fifths of the wealth that disappeared during the recession. This translates into nearly $6 trillion increase in household wealth in the first three quarters of 2012 alone, or more than half of the increase in consumer spending in that period.

With consumption poised for an up-tick and the first of the fiscal clifflets out of the way, all eyes are on earnings season, which kicks off in earnest this week. Expectations are for an eight percent rise in S&P 500 earnings after a four percent increase in 2012, building on the street’s 2% year-over-year growth expectations for the fourth quarter. It's beginning to look a lot like a stock pickers market again, with the CBOE S&P 500 Implied Correlation Index falling to two-year lows. This is another reason for investors to focus closely on the boardroom numbers coming out in the next few weeks.

China 's December import/exports were very strong and consumption is due for a rebound in America . While Europe is still mired in the slow lane, the news is decidedly better than in recent years. Although fiscal tightening and continued fiscal uncertainty will likely restrain consumer spending in the near term, a meaningful pickup is on the way. With the S&P 500’s current 13.1 forward PE looking attractive and with the consumer rebound in the works, I favour stocks over bonds and look forward to a prosperous 2013.


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