It seems like ancient history, but consumers were in an awfully good mood a decade ago. Back then, price pressures were relatively contained and unemployment levels were fairly low. Taken together, these two measures of consumer health created a powerful tailwind for spending on a wide range of goods and services.

#-ad_banner-#Of course, the good times couldn’t last. The Great Recession of 2008 led to massive increases in the unemployment rate and consumers are still feeling the lingering psychological effects to this day.

For example, consumers are now wary of taking on debt. Total household debt (mortgages, credit card balances, car loans, etc.) has fallen by nearly $20 billion over the past five years, according to the Federal Reserve.

With consumer balance sheets now in better shape, consumers are likely to respond to remarkable turnabout in what is known as the “misery Index.” This index combines the national inflation rate and the national unemployment rate.

It was often cited back in the 1970s, when the index was synonymous with “stagflation.” These days, we should call the misery index the “relief index,” because it hasn’t been this low since the good old days of 2007.

Source: U.S. Commerce Dept.

As you can see, unemployment rates appear poised to keep falling and average 5.5% in 2015. And thanks to the plunge in oil prices, inflation pressures are back at levels not seen since 2009.

This is unmitigated good news for the retail sector. Trouble is, major retail stocks already reflect a fair bit of the good times yet to come for consumer spending. The SPDR S&P Retail Index ETF (NYSE: XRT), for example, has been marching higher throughout the prolonged period of depressed consumer spending. It is likely to keep rising as the consumer economy firms, but gains may be limited as a result of full valuations. The stocks in this fund trade for 18 times projected 2015 profits and 11 times projected cash flow, according to Morningstar.

As a result, investors may want to skip retail ETFs and directly target undervalued stocks that are poised for a consumer spending renaissance. You can find dozens of examples if you dig deep enough and a few examples of such stocks come to mind.

Take recreational vehicle (RV) maker Winnebago Industries, Inc. (NYSE: WGO) as an example. Its shares dropped to a recent $23, from the 52-week high of $29, on concerns that near-term growth will be tepid. Analysts model revenue growth of 5%-to-6% in fiscal (August) 2015 and 2016. But Winnebago may be poised to do a lot better than current consensus forecasts suggest, as the misery index remains near a decade-low and falling oil prices boost the prospects for RV demand and U.S. travel.

Falling unemployment rates are proving most helpful to people that have been out of work (or under-employed) for an extended period of time. And employers such as Wal-Mart Stores, Inc. (NYSE: WMT) are finally starting to give raises to people on the lowest rungs of the economic ladder. With increasing disposable income, such consumers can start to boost spending — or renting as they case may be.

Rent-A-Center, Inc. (Nasdaq: RCII), for example, is a leading destination for shoppers in search of furniture and electronics. Purchasing such goods may be out of their reach, but rentals are not. The company’s “rent-to-own” strategy has proven increasingly appealing in tough times.

Shares of RCII have fallen more than 20% in the past few months after the company reported a Q4 profit shortfall. But it’s important to remember that RCII has a great deal of operating leverage, so modest sales growth is expected to lead to double-digit profit gains in the third and fourth quarters of 2015, as well as all of 2016. Rent-A-Center is also a solid proponent of share buybacks; the share count has fallen for eight straight years, to a recent 55 million, from 74 million in 2005.

Looking at the traditional retail sector, it’s helpful to find good companies in the midst of bad quarters. Sporting goods retailer Cabela’s, Inc. (NYSE: CAB) is a clear example. Its shares have slid to the low $50s, from the low $70s last year. That move comes as 2014 sales growth slowed to just 1% after two years of double-digit gains.

Yet management is tweaking the store format to what it calls “new generation” stores. Thus far, only 18 have been remodeled, but on average, they are generating 40%-to-50% greater revenue and profits, on a square foot basis.

“The exceptional performance of these new stores continues to give us great confidence in our future store openings, with our 2015 store openings marking our entrance into many highly anticipated markets,” said CEO Thomas Millner in a mid-February call with analysts.

That leads him to predict that Cabela’s will return to double-digit revenue growth later this year and into 2016. A more confident U.S. consumer would only underscore that view.

Risks To Consider: Consumers remain a bit skittish, despite the falling misery index and any fresh economic setbacks would lead them to hunker down anew.  

Action To Take –> It’s hard to overstate the importance of the U.S. consumer economy. It’s an engine that can power global trade flows.  When this powerful force truly rumbles to life, virtually every type of consumer-facing business model should benefit, though it pays to focus on the value-oriented stocks noted above. 

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