Consumer spending drives the economy and gross domestic product (GDP) growth, accounting for about 70% of GDP in the U.S.

The retail sector has been rebounding in spite of the lack of jobs and the declining home prices. The S&P Retail Index (RLX) is trading near its 52-week high, up 37% from the 52-week low. The RLX recently traded at its highest level since the index was created in 2007.

The upward move of the retail sector is impressive given the constraints. I sense that retailers are just more efficient as far as production and inventory control and have not been caught with excess inventory as was the case in the past. This is not to say that the retail sector is the place to make money, but there are some winners and market leaders.

The headline Retail Sales reading for June increased 0.1%, slightly above the estimate calling for a decline of 0.2% and up from an upwardly revised negative 0.1% in April. Excluding the auto portion, Retail Sales were flat and in line with estimates.

On the plus side, consumers are spending, but the lack of consistency is troublesome. And, given that gasoline prices are high, this reduces the disposable income that consumers have to spend on goods and services. You may not buy that DVD player you had been eyeing. This may not sound like a big deal, but think about it this way. Not buying that DVD player has a trickle-down effect as far as spending and negatively impacts total spending.

But this is not to say that you must avoid retail. The key for success is selective picking.

My investment advice and best stock advice to you would be to stick with the leading discount bellwether retail stocks.

In the large-cap area, these include Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).

Costco reported a 14% jump in its key same-store sales reading in June, well above estimates. Net sales for June surged 18% year-over-year. The results are consistent and continue to show steady growth, but, for that extra margin of growth, you should look at the smaller discount retail companies.

Costco, for instance, has a market cap of $34.55 billion and is estimated to report sales growth of 12.8% and 8.1% for the FY11 and FY12, respectively.

For comparison, take a look at small-cap PriceSmart, Inc. (NASDAQ/PSMT; market cap; $1.73 billion), an operator of 28 warehouse clubs in 11 countries in Central America and theCaribbean. PriceSmart reported a booming 19.7% increase in its same-store sales in June, along with a 21.1% year-over-year rise in June net sales. These are well above the growth metrics for Costco. Consider the comparative sales growth for PriceSmart, which are 22.3% and 14.2%, for the FY11 and FY12, respectively. The growth estimates are probably conservative and could really take off if the expansion continues.

Another interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operates a staggering 9,300 stores across 35 states. Dollar has reasonable valuation and above-average price appreciation potential for investors.

And when housing picks up, I expect spending to continue to increase, especially on non-essential goods and services reflected by Durable Goods.

It does appear that a reversal is occurring in retailing. The key is to look for same-store sales growth in retailers that sell non-essential goods. Increases here could mean consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items.

My favorites in the retail space continue to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product line. This will offer consumers a one-stop place for shopping and make more money for these companies.

You should continue to stay away from automakers at this time. I have not been optimistic on automakers for several years now, as the growth in North America is absent and declining. The big three U.S. automakers are struggling in light of rapidly declining demand for SUVs and larger vehicles. With the price of gasoline close to $4.00 a gallon in the United States and about $1.30 per liter in Canada, you’ll understand why demand for gas-guzzlers is declining fast.

In my last commentary, I discussed the situation with General Motors Corporation (NYSE/GM), which announced that it would be closing three plants in the U.S . and one in Canada. Why anyone would put dead money into an auto stock is not clear. GM just said that its sales in the U.S. fell by an adjusted 30.2% in May, while Ford Motor Company (NYSE/F) announced a 15% decline in its May sales. Car sales did jump three percent for Ford, but this was offset by declining SUVs and pickups.

The demand for smaller and more fuel-efficient cars continues to drive the auto industry given the high cost of gasoline. Even Toyota Motors Corporation (NYSE/TM) saw its U.S. sales fall by 4.3% in May, highlighted by a 12.2% decline in truck sales.

With the higher gasoline prices, the key is to look for growth in foreign auto markets such as China. U.S. automakers are already there and are doing well. China’s massive auto market surpassed Japan in 2006 to become the world’s second largest market for vehicle sales after the United States. And with estimates from industry pundits saying that the country will become the second largest producer of vehicles by 2010, you can understand our optimism towards China.

Companies that could benefit from growth in China’s auto sector will be the parts suppliers. There are numerous small-cap companies in this category that trade on U.S. stock exchanges.

Why is it that we can buy Wal-Mart stock for the same price today as we could have in 1999? We certainly know Wal-Mart is making a lot more money today than it did back then. But, here we are, seven years later, and the shareholders of Wal-Mart have failed to see profits on their stock.

Wal-Mart, at least to me, is much more than a stock. The company is the world’s largest retailer. Last year’s sales were a mind- boggling $315 billion. Depending on whose research report you believe, Wal-Mart accounts for between 7% and 8% of all U.S. sales.

To me, Wal-Mart is a gauge of U.S. retail sales. It’s quite common to see the stock of Wal-Mart move up or down depending on retail sales figures coming out of the U.S. It’s also been quite common of late to see Wal-Mart shares get “hit” when oil prices spike. The company itself has commented on how higher gas prices are negative for the company, because customers who live further away may reconsider their trip to a Wal-Mart location if it gets too expensive to get there.

If Wal-Mart is a leading indicator of how well or how poorly the U.S. retail market is faring (and I believe Wal-Mart represents the U.S. retail industry quite well), we can assume the price action of Wal-Mart stock is negative for U.S. retail sales. I believe Wal- Mart stock is saying there is a problem somewhere ahead for retail spending.

The other day I wrote about how U.S. new home builder stocks are down almost 50% in the past year–a negative indicator for the U.S. construction and new-home industries. Couple this with poor performance we are seeing from Wal-Mart stock and one can only wonder if the U.S. economy is headed for some kind of consumer siesta.

It’s all quite obvious to me: By the summer of 2004, Greenspan had brought interest rates too low. Consumers borrowed their hearts out. Now the Fed has raised interest rates too high, too fast, and consumers simply can’t keep up with their payments. We can see all this in the price action of stocks that benefit from consumer spending or suffer when consumers pull back on their spending. Too bad most investors can’t see these clear signs, because if they did, they would be unloading consumer sensitive stocks instead of waiting for these stocks (home builder and retail stocks in particular) to move up again. “Again” might not happen for some time to come.