Despite grim predictions that the credit crunch would choke off the economy's biggest engine — consumption — people have indeed been spending again.

After $1.4 trillion of cuts on unused credit card lines in 2008 and 2009, and a 3% drop in overall consumer credit, to $2.4 trillion (auto loans are the biggest piece of the pie), real personal consumption continued to climb out of a deep trough in the first two months of this year, according to the Commerce Department.

In a report last month, Dean Maki, the head of U.S. economics research at Barclays Capital Inc., declared that "deleveraging is overrated," and pointed out that spending also rebounded ahead of credit in previous cycles (see charts) as wages and salaries rose.

An important factor likely to boost consumption this year, Maki wrote, is a recalibration of expenditures in response to the recovery in stock market wealth after the rally last year. (In 2009, household net worth increased 5%, to $54 trillion, according to the Federal Reserve — regaining about a fifth of the ground lost the previous year — as holdings of stock and mutual fund shares jumped 30%.)

In a similar vein, economists at JPMorgan Chase & Co. have argued that consumption can grow "at a reasonable pace" even as households deleverage. An important element of their view is that surging borrowing in the 2000s was mostly a "housing story," with the additional mortgage debt being used to finance more homeowners and higher home prices, while growth in consumer spending roughly tracked with growth in disposable income. (Now, defaults are wiping out a large chunk of the mortgage burden.)

Still, credit constraints are widely believed to be imposing a drag on growth. Moreover, considerable damage to household balance sheets remains, the psychological shock of the recession may drive savings higher yet, and the direction of spending will principally hinge on whether improvement in the labor market replaces the fading impact of stimulus measures on personal incomes.

In a report this month, Maki wrote that the pace of growth in consumption is "unlikely to return soon" to levels posted in the middle of the decade, when gains in real estate values combined with rising stock prices to fuel spending.

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