As we head into the final quarter of the year, a clear narrative has emerged. We’re on track for the most robust job growth in a decade, while consumer spending slowed to a crawl in 2014. A key explanation for the disconnect: The quality of jobs being created aren’t very good, and they don’t pay enough money to support a thriving consumer economy.

#-ad_banner-#But that narrative is too simple. Buried in the employment reports, you’ll find data that suggest we’re also creating well-paying jobs in the energy sector, professional services, technology and elsewhere. That translates to a strong likelihood that the national unemployment rate will to decrease to less than 6% faster — by one-to-two years — than most economists predicted in 2012.

Here’s the good news that few are talking about: consumer spending, which only recently was seen as lifeless, is actually springing to life.

According to the Commerce Department, retail spending rose 0.6% sequentially in August, and 5.0% from a year earlier. Auto sales and spending on personal care and healthcare led the way. When you’re talking about a part of the economy that accounts for more than $400 billion in monthly activity, this is a big deal.

Why the sudden upswing, and more importantly, can it last? Michael Darda, the chief economist for MKM Partners, suspects that we’re entering into a virtuous cycle for retail spending. He thinks “the pickup in sales is sustainable due to three bullish forces colliding: improving labor market conditions, rising confidence levels and a sharp fall in gasoline prices.” (The average retail price of gasoline is $3.35 a gallon, down from $3.96 a gallon in January).

To be sure, changes in gasoline prices and employment trends mean very little if consumers continue to feel insecure. Recently, they are starting to sound a little more secure. The August Conference Board Consumer Confidence Index rose to 92.4 — the highest level since September 2007. New data will be released Tuesday, September 30.  

Earlier this month, I noted a nascent rebound in corporate spending and it’s important to see the corporate and consumer trends in tandem. Higher consumer spending leads companies to boost investments in their production capacity and staff, and greater spending by corporations trickles down into paychecks. As a result, the stage may be set for a virtuous feedback loop, which is why many economists now think the U.S. economy can grow at a 2.5% rate in 2015.

Where To Invest
As retail spending starts to rebound, a wide range of investments should benefit. You can check out exchange-traded funds, such as the SPDR S&P Retail ETF (NYSE: XRT). Or you can seek out retailers that are boosting profits now, even as sales growth remains muted. Kohl’s Corp. (NYSE: KSS), for example, has been using the period of slow spending to re-focus on merchandising and expenses, setting the stage for a 10% profit gain in fiscal (January) 2016. Analysts think Kohl’s sales will grow less than 2% next year, but if the recent signs of higher retail spending become a trend, then Kohl’s is poised for upside revisions to sales and profit forecasts.

A few other retailers to consider:

Destination XL Group, Inc. (Nasdaq: DXLG)
This company sells formal wear and business casual clothing to the “big and tall crowd.” It has been shuttering underperforming stores under its former Casual Male brand and focusing more resources on its successful Destination XL store format. The transition is impeding profitability now, but this retailer has ample operating leverage to a boost in retail spending. Meanwhile, shares are off by more than 30% from the 52-week high.

La-Z-Boy (NYSE: LZB)
This furniture maker and retailer fell to a 52-week low this week, yet it has a history of solid free cash flow generation. Shares trade for around 12 times projected fiscal (October) 2016 profits.

Pier One Imports (NYSE: PIR)
This is another retailer that is touching 52-week lows. In fact, shares have lost half of their value since the year began and are now valued at around 11 times fiscal (February) 2016 profits.

Tile Shop Holdings (NYSE: TTS)
This purveyor of tile flooring has seen its shares plunge to $10 from $30 this year in the face of slowing same-store sales. The slump in retail spending earlier this year surely had an impact. Yet as noted, those clouds may be lifting. Meanwhile, an ongoing rollout of new stores is expected to boost sales by 15%-to-20% in 2014 and 2015. Any improvement in same store sales would lead to upward estimate revisions.

Risks to Consider: Consumer sentiment can be a fickle beast. The emerging economic problems in China and Europe, coupled with military actions in the Middle East, could still lead to a pullback in consumer confidence gauges.

Action to Take –> Compared to a year ago, hundreds of thousands of people have joined the U.S. workforce, and in coming months, that trend is expected to continue as companies boost spending. That should set the stage for a healthy retail backdrop in 2015. Investors will rotate into retail stocks as soon as that trend looks sustainable. This is a good time to boost your exposure to this sector, especially those that have been out of favor in recent quarters. Destination XL remains as my top retail turnaround pick, while La-Z-Boy and Pier One Imports are clear value plays.

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