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Consumer spending is an important part of the economic forecast, though not the whole story. To predict future spending, I look at consumer incomes, pent-up demand, interest rates and credit availability, and attitudes. But attitudes are mostly derivative from the fundamentals.

When incomes are up and unemployment is low and interest rates are low and gasoline is cheap, then it’s pretty certain that consumer confidence is strong. I always look at the two major surveys of consumer attitudes, but I don’t expect to be surprised. The times when the surveys really show their worth is after major non-economic events, such as war. Right now, both the Conference Board’s Survey of Consumer Confidence and the University of Michigan’s Consumer Sentiment Index are strong.

Now for the fundamentals.

The growth rate of real disposable income has slowed. Income is still rising, but at a slower rate of gain. Two years ago real incomes rose at nearly five percent annually, and most recently just one percent. Job growth has decelerated by 0.7 percentage points. The decline in consumer spendinggrowth is less pronounced than the income growth decline, which is consistent with economic theory. Consumers tend to have more stable spending trends than income trends. But that’s a temporary effect.

The arithmetic works out to a substantial drop in the personal savings rate, from six percent two years ago to 3.5 percent recently. It’s unlikely that consumers will continue to grow their spending so much faster than their incomes are rising.

Dr. Bill Conerly's consumer spending forecast.

Interest rates for consumers are low and will only edge up a little. Credit availability is likely to remain good.

The best case for more consumer spending would be if wage rates accelerated. We’ve all been waiting for this to happen with the tighter job market, but it has not happened yet.

The most likely path for consumer spending is weak growth in the second half of 2017 and early 2018. After that, wages will rise, improving incomes and enabling faster growth of consumer spending.