The recession saw consumers worldwide putting off purchases.

“The U.S. consumer has gone through a period of deleveraging,” says Bob Sewell, CEO of Bellweather Investment Management in Oakville, Ont. “They pulled back and stopped spending in order to save and pay down debt.”

But, with employment levels south of the border slowly improving, consumer confidence is rising while credit terms remain easy. That’s combined to get people out buying cars and consumer durables such as fridges, washing machines, electronics and furniture.

It’s a wave Carlos Gomes, a senior economist with Scotiabank, doesn’t see ebbing any time soon. “There is significant pent-up demand,” he says. “And not only is the demand there, but U.S. households actually have the ability to go out and buy.”

Gomes cites the percentage of disposable income accounted for by the cost of carrying debt, filling gas tanks and home heating.

“Back in 2007 and 2008, it took about 20% of disposable income,” he says. “Now it’s absorbing only about 15%; that’s the lowest level since the late ’90s and it bodes well for consumer spending.”

Auto demand has legs

The big auto makers already are benefiting, with Ford, Chrysler and GM all posting excellent sales figures this year.

“The average age of the U.S. fleet is now 12 years old,” Gomes says. “Prior to the economic downturn in 2007, [the average age] was less than nine. People are starting to replace their aging clunkers.”

The energy sector

A growing North American economy should push up demand for energy, says Sewell, and that bodes well for energy companies in general.

But Canadian companies that are just extracting oil from the ground and trying to get it to market face two problems. First, they don’t have enough pipeline capacity. And, second, advances in technology (think fracking) have raised the prospect that North America could become energy self-sufficient.

“Demand will rise, but you’ve also got a growing supply,” says Sewell. “That supply-demand balance will likely keep prices in a degree of check.”

For those reasons, Sewell favours pipeline companies like Enbridge, as well as large global players like Chevron, Royal Dutch, Shell and Exxon. They can benefit from growth at home, as well as in expanding markets like Asia.

“They can sell their oil at benchmark WTI and Brent oil prices,” says Sewell. “They’re getting fair value for their oil.”

Gomes predicts demand will continue. “We see sales increasing this year and next,” he says. Clients can take advantage of this growth either by investing directly in U.S. manufacturers or through the Canadian auto parts manufacturers that supply them (Magna International, Linamar Corp. and Martinrea International). North American automakers also offer exposure to high-growth markets, like China, without requiring direct investment in Chinese equities. “One of the things we look at is [market] penetration,” Gomes explains. “If you look at the G-7 industrialized nations, it’s roughly 600 vehicles for every 1,000 people. If you look at China it’s roughly 70 vehicles per 1,000 people.”

While current income levels are lower in China, “they are growing rapidly,” he says. “And as household incomes increase, the ability to go out and buy a first car will increase.” GM, he points out, is one of the market leaders in China, and Ford is building up its position.

Consumer durables

Sewell says demand for consumer durables is also growing, particularly in the U.S., thanks to improving employment prospects and personal balance sheets that are now stronger than those of their counterparts in Canada.

There’s also a strong connection between spending on consumer durables and new home purchases. He notes people spend more on durables like fridges and electronics when they buy a new or resale home. “We’re seeing strong trends in the U.S. home-buying market and we expect that to continue over the coming year,” says Sewell. “We’re also seeing spending on recreational vehicles.”

Bombardier Recreational Products shows strong growth, and U.S. recreational stocks, like Winnebago Industries, also have performed well. “That discretionary recreational spending is part of the same wealth effect we’re seeing on the home buying front,” he explains.

Investors can play the consumer durables trend by buying individual stocks like Home Depot, Lowes, General Electric and Black and Decker, or by investing in ETFs. Sewell points to the iShares Home Builder’s ETF (ITB), which captures U.S. homebuilders plus Home Depot, Lowes and Sherwin Williams, and the Vanguard Consumer Discretionary ETF (VCR) as good ways to gain exposure.

That said, he contends, there’s a danger in getting too narrow. “We’re not advocates of people chasing individual sector ETFs,” he says. “The advantage of an ETF is that it offers broad exposure.”

The Canadian market

Pent-up demand’s not as intense in Canada because it was more buoyant through 2009 and 2010, Sewell says. “The U.S. is starting to catch up and Canada is starting to slow down.”

While U.S. consumers got their houses in order by eliminating debt, Canadians borrowed more. And the Canadian housing market has been cooling, while the U.S. housing market heats up.

As a result, Sewell views North America as one big market. “We simply look for the best opportunities sector by sector,” he says. “When you look at things that way, Canada becomes a much less significant element of your portfolio.”

Outlook for business equipment

The money is there. Corporate balance sheets are strong. Yet U.S. companies are not spending on capital goods like equipment and vehicles.

“Money is not what’s holding them back,” says Karen Ubelhart, commercial vehicles analyst for Bloomberg Industries. “It’s about whether demand is going to pick up to a sustainable level that companies are comfortable adding, or even just replacing, equipment.”

Like consumers, businesses rein in spending when times are tough, slowing replacement of equipment and reducing investment in new equipment. For instance, the total truck fleet in the
U.S. is at a record average age of 9.6 years old and “on average capital equipment is quite old,” says Ubelhart.

But things are expected to improve. As the economy recovers, more goods need to be shipped, making it necessary to replace or expand aging fleets. “It is one of the first sectors to turn,” says Ubelhart, “and we’ve had five or six good months of orders now after a real contraction in the second half of last year. Orders are slightly above replacement level.”

Another bright spot is the energy and processing sectors, where “we are starting to see some new capacity built—particularly in the chemicals processing sector.” Residential construction is also strong, but both non-residential construction and public projects are lagging, says Ubelhart. “We need to see the non-residential piece come back.”

The big question: when exactly will American companies start making capital expenditures? “In most sectors, future growth is contingent on the economy,” says Ubelhart. “If we could get industrial production over 3% and GDP solidly above 2.5%, we’ll start to see more activity.”

Her prediction: the recovery will be pushed to late this year or the beginning of next year. “The equipment is old, but the confidence has just not been there,” she says.

Camilla Cornell is a Toronto-based financial writer.