The Role of the Consumer in the Economic Recovery

The U.S. economy is the largest in the world and consumer spending accounts for approximately 2/3 of our economic activity. Therefore, a reviving US consumer will be a big help not just domestically but globally. Based on this, it appears that when the world economy gets pulled out of recession, it will likely be with the help of consumer spending.
Not so fast. The US is not in the midst of a consumer spending boom and the prospect for one does not seem to be on the horizon either. The consumer spending boom that I am referring to is going on in China. This year, it is expected that China will overtake the U.S. in sales of automobiles, refrigerators, washing machines, and desktop computers. The biggest consumer market in the world in a few years may no longer be the U.S.—it may be China.
The “new normal” that Bill Gross refers to is going to be a global investment marketplace, not one that is focused solely on the US. While it may not be comfortable to move toward a global investment policy, it might be the only way to earn a decent return.
Fortune editor Geoff Colvin has an interesting interview with Pimco’s Mohamed El-Erian. Among other things, Mr. Colvin asks him what investors will have to do differently to cope with the new global environment. Mr. El-Erian’s response is quite direct:
“The average investor has two issues today. First, the average investor is too U.S.-centric. There’s a reason for that; the behavioral finance people will tell you that we like the familiar, so we tend to invest in names that we know, that give us comfort.”
“The problem is that you don’t want to be too U.S.-centric in a globalizing world where the center of gravity is shifting. So the first thing for the average investor to recognize is that the asset allocation of tomorrow is much more global than the asset allocation of yesterday.”
“Second, most of us have been very lucky — we haven’t had to worry about inflation for a long time. We’re moving toward a much more fluid world in which, at some point, inflation will come back.” Mr. El-Erian suggests that individual investors need access to an inflation hedge.
Along this line, CNN Money is currently running a poll on their website, asking investors “Which type of investments will you focus on in 2010?”

The results thus far:
U. S. Stocks 35%
Emerging Markets 15%
Bonds 10%
Commodities 6%
Bank accounts 33%

At the risk of redundancy, I am repeating what was stated above, “the asset allocation of tomorrow is much more global than the asset allocation of yesterday.” The average investor, based on the results of the poll, has not yet grasped this fact. To capitalize on the growth of the world economy it is incumbent on us to invest in the emerging markets; China, Brazil & India, to name a few.
In summary, we need to watch for slower growth in the US, depend less on the US consumer’s spending as a driver of global growth and focus on the smaller economies which may take up the leadership baton.

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