The outlook is modestly positive. Declining energy prices will boost real incomes and spending.
The raises in interest rates will reduce the willingness and ability of consumers to continue their pace of borrowing. This is both directly -- through the cost of debt -- and indirectly -- because it's likely to slow house price appreciation.
It just suggests that consumers, particularly lower-end consumers, are going to be more stretched when these loans reset, with potentially negative implications for spending growth.
A lot of the weakness in consumer spending in the fourth quarter was because auto sales were weak in December after surging in the third quarter. It's important to look beyond auto sales. At least for the first quarter, it's not going to take much for consumer spending to look good.
Consumer spending is likely to become much more dependent on jobs and confidence by the third quarter, ... If labor markets have not turned, boosting confidence by then, the risk of a significant slowing in consumer spending will be very high.
We're assuming January was all about the weather.
Going forward, sales growth will be more modest and inconsistent. Fundamentals are mixed. The biggest drag is high and rising gasoline and other energy prices.
The surge in building supplies is definitely tied to favorable weather as were increases in restaurant, furniture and department store sales.
If consumer spending falls, the probability of the economy slipping back into recession is very high.
Low interest rates and rampant house price appreciation have really been driving borrowing. As long-term rates finally start to rise, the pace of debt accumulation will slow.