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Consumers Are Reloading After Killing It For Years

The Standard & Poor's 500 index rose 1.6% last week but the big blue-chip U.S. companies closed down fractionally on Friday despite some very positive economic data.

Data released on Friday, February 26, by the U.S. Commerce Department showed discretionary personal income rose 4% from a year ago. That's a sharp increase and is evidence that consumers are reloading and could fuel another growth phase for the U.S. economy.

Also on Friday, the Government changed its estimate of U.S. economic growth in the fourth quarter of 2015 from seven-tenths of 1% to 1%.

But if you look behind the GDP growth figures, at its components, the outlook becomes even more encouraging.

The image above shows you the four cylinders of growth in the U.S. economy. These four cylinders are not created equal.

The most influential one is in the upper left. Personal consumption accounts for about 70% of economic growth.

Now even though the most recent personal consumption data for the fourth quarter of 2015 showed a dip, the four cylinders are positive and indicate that the long-term growth trend remains intact.

This image above is just the Government spending component of GDP. Government spending was slashed after the financial crisis. In 2010, Government shrunk and spending - mostly at the municipal level - was slashed. Government spending was a drag on economic growth for six years and has slowly recovered.

While Government spending did not grow in the fourth quarter of 2015, it is poised to continue its upward long-term trajectory and likely to zag up again in the quarters ahead, according to Fritz Meyer, an independent economist who compiles this data for our firm.

According to Meyer, the cylinders of economic growth could bring a positive surprise.

Meyer says sometime in 2016 personal consumption could grow by 2%, and private domestic Investment could revert to a one-quarter of 1% growth rate, while growth in spending by government could add another one-quarter of 1% to GDP.

That would give the U.S. GDP a 3.25% growth rate. For the last two years the economy has grown at a 2.1% rate.

The big driver as always is personal consumption expenditures and that does seem likely to remain strong because it is being driven by disposable personal income and the numbers, which takes us back to the data released Friday.

Disposable personal income is the driver of the 4% growth rate in personal spending that was reported Friday, which is shown in this black line.

That 4% compares to the 4.4% that was seen at the peak of the economic cycle before The Great Recession. That is strong growth.

Finally when you subtract the black line, representing personal outlays, from the red line representing disposable personal income, the result is the gray line, which is personal savings.

The 5.2% savings rate is much higher than the savings rate at the peak of the last economic expansion. Consumers are saving some of the money they are saving on lower gasoline prices.

Consumers, then, may actually be reloading right now in advance of another growth phase in the economy.