Consumers are feeling better than they have in years

Look out -- the U.S. consumer is back.

It took about six years after the devastating financial recession hit, but most Americans appear to be finally feeling better about the economy and the future. Falling gas prices are helping. So is a general expectation for higher wages and job growth.

Consumer confidence hit a seven-year high in October, according to a closely watched index from the University of Michigan and Thomson Reuters. The index rose to 86.9 that month from 84.6 in September. Earlier this week, the Conference Board said that its consumer-outlook index rose to 94.5 from 89 in September, beating the predictions of many economists.

The burst in consumer confidence comes even as signs still point to a shaky economic recovery. The stock market has been in turmoil, the dollar is rising and geopolitical dramas are rocking economies across the globe. U.S. consumer spending fell in September for the first time in eight months.

Americans seem to be brushing those problems aside, however, and focusing on some of the more positive trends emerging in the economy. The most significant of those may be the average price of a gallon of gasoline, which has fallen from $3.33 a month ago to $3 on Friday. Drivers will likely spend most of the money they save on gas instead of saving it, say economists at IHS Global Insight.

"Lower- and middle-income households in general -- who spend a higher proportion of income on gasoline -- are likely to see significant relief from the fall in pump prices, especially during the holiday shopping season," economists Doug Handler and Chris Christopher said in a recent note. They calculate that a 10 percent fall in the price of gasoline triggers a 1.5 percent increase in consumer confidence.

Rising pay also seems to be boosting Americans' spirits. Wage growth, as measured by the Employment Cost Index, rose by 0.7 percent in the third quarter -- more than economists expected. For the 12-month period ending in September, wages grew by 2.2 percent, up from 1.9 percent the previous year.

And though wages are rising, inflation has generally been mild. That's a recipe for more spending and perkier consumers.

The pieces are now in place for strong spending this holiday season on everything from clothes and household goods to big-ticket items such as cars and refrigerators. Retailers are doing what they can to grab a share of that consumer spending, including matching each other's prices, shipping more items for free and rolling out a high volume of holiday sales and promotions starting this weekend.

  • Kim Peterson

    Kim Peterson is a financial journalist covering business and the economy. She has written for several online and print publications, including MSN Money and The Seattle Times.