Last year's holiday shopping season was a dismal one for the US retail sector. But the plunge in sales didn't come as a total surprise to retailers because consumer spending had already started to collapse from mid-year. This year, there are hopes for a better outturn, as shoppers are showing greater willingness to venture into stores.

Traffic is higher in the malls, and consumers are demonstrating a little more eagerness, though they are still rather careful about parting with their dollars. Price is very important for the average shopper and they are picky about what they buy, looking for value. Gone are the days when consumers were willing to splurge if the urge was strong enough. And many are prudently refraining from running up credit card balances, preferring to deal in cold hard cash.

Astute retailers are aware of the new priorities and are squeezing costs to offer as many bargains as possible. The cost squeeze travels all the way down the line to manufacturers at home and abroad. It may be tougher for them to make a buck but they are glad to get the business.

Retail sales have been firming recently, and this constitutes a hopeful prelude to the holiday season. As of the latest data-print available, for October 2009, ex-auto sales have been up for three consecutive months, calculated as seasonally-adjusted monthly percentage changes. Auto sales, on the other hand, have fluctuated sharply because of the impact of the government's "cash for clunkers" programme.

As expected, improvement in the labour market is lagging the rebound in economic activity. This is normal in any cycle but it is proving to be particularly sluggish in the current one because of the severity of the downturn. The unemployment rate in October printed at a lofty 10.2 percent. In addition, there are many discouraged workers who don't even appear in the statistics. The bad news is that Job losses are continuing, but the good news is that it is happening at a slower pace. The decline in non-farm payrolls maxed out in January and has been on an improving trend since then.

The housing market has found a firmer footing. Well, with all the government measures in play, including fiscal advantages for first-time buyers and plenty of engineering by the Fed to keep mortgage rates low, the beneficial impact of their effort isn't surprising. Frankly, the Fed will do anything to alleviate the debt load and boost the housing market, even at the cost of a dose of higher inflation. Of course, they will claim falsely that their intentions are entirely pure and noble and they can fine-tune any problem that arises.

It looks like house prices have bottomed, with recent evidence painting a more positive picture. The Case-Shiller home price index for 20 major metropolitan regions rose 0.3 percent in September relative to the previous month. This was the fourth monthly increase in a row. Since the low in May 2009, the index is up 10.3 percent at an annualised rate. Not bad for a housing market that looked dead not so long ago.

The volume of activity is rising too. October existing home sales rose a strong 10.1 percent, after registering a healthy 8.8 percent in September. Meanwhile, distressed sales stand at 30 percent of the total, down from a horrid 50 percent earlier in the year. At the same time, the stock of housing inventories continues to trend lower, although it has further to go to help underpin house prices.

Consumer credit is tight and households are paying down debt. But as the pace of deleveraging slows down, this should be accompanied by a further willingness to spend. The strongest impulse, though, should come from an improving labour market rather than credit conditions.

Indices of consumer confidence are out of the doldrums but still well below historical averages. The most forward looking index is the University of Michigan's index of consumer expectations.

It has tracked higher since the beginning of the year but has stalled in recent months.

So, in sum, the household sector has found a bit of footing after the brutal experiences of the recession.

Without the government's exceptional monetary and fiscal policies, its situation would have been much direr today.

The higher savings rate achieved by the household sector has been made possible by the government's willingness to run a huge deficit.

Recovery in consumer spending may not be sufficient to drive Recovery in consumer spending may not be sufficient to drive the sort of Gross Domestic Product growth that everybody hopes will occur. For that to happen, business capital expenditures and, more importantly, net exports must play a significant role. The mix between consumption and net exports will be critical in determining the fortunes of the economy and the ability to correct imbalances internally and externally.

The price of the extraordinary government measures has yet to be fully paid. It could eventually come in the form of higher inflation, a heavier tax load, cutbacks in spending, and greater volatility.

Iraj Pouyandeh is a strategist and senior portfolio manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com