Pessimists like to gloat that what we're seeing in this recession is U.S. consumers getting their comeuppance.
Decades of reckless borrowing peaked two years ago and has since started tumbling down, wrecking the economy along with it.
All we have to show for it now are piles of unwanted stuff, bigger piles of debt and over-mortgaged homes, and we could be left with ho-hum economic growth for years.
But this bleak view overlooks a big piece of today's global economy: U.S. consumers were, in one sense, making a huge investment in the economies of emerging-world countries as we purchased their stuff.
Now that investment should pay off. Emerging economies are starting to truly emerge as economic powerhouses, with some already casting off the global recession and posting strong growth. Take stocks, for example: Even after a strong rally, the U.S. market is merely about even this year. China's market is up 27%. India's is up 48%.
The good news: This will help the U.S. bounce back, perhaps more strongly than most anticipate, as a world of new consumers starts buying our stuff. The risk, at least if you're nationalistically minded: Though the U.S. may not lose its leadership role in the global economy, its superiority will dwindle.
Decoupled prosperity
It turns out that decoupling is real.
Next, expect consumers in these emerging economies to start buying more stuff made in the U.S., nudging the U.S. back to "normal" growth of 3% to 3.5% per year sooner than many people expect, says James Paulsen, an economist and market strategist with Wells Fargo.
And that is how the "investments" made by U.S. consumers will pay off. Our spending helped them build up industries, creating jobs and consumers -- who now can turn around and buy from us.
To be sure, emerging-market economies deserve credit, too. Most of their financial institutions steered clear of the credit-market mess that has crippled the more advanced economies of the U.S. and Europe, says Cristina Panait, who follows emerging markets as a portfolio manager of the Payden Emerging Markets Bond Fund (PYEMX).
But here's a closer look at how the U.S. consumer helped create this boom.
A second Marshall Plan
The payoff came in the 1950s and 1960s, when European demands for our stuff contributed to robust U.S. economic growth. This ingenious strategy was called the Marshall Plan, named after then-Secretary of State George Marshall, who played a key role in developing it.
Now the U.S. is starting to benefit from an unofficial Marshall Plan set in motion by U.S. consumers over the past 15 years, Paulsen believes. As U.S. consumers binged, a lot of what they bought came from factories in China, India, Indonesia, Vietnam and other emerging-world countries. During this time, the U.S. ran trade deficits of about $650 billion a year, Paulsen estimates. That means we spent that much more abroad than foreigners bought from us.
That money helped emerging-market nations build out their infrastructure. It paid the salaries that fueled the growth of now-thriving middle classes. "We ran trade deficits for the better part of a decade and a half, and that amounts to a constant investment in these economies," Paulsen says. The result was a "new world consumer, with wants, desires and savings."
Trade deficits were criticized along the way as a sign the U.S. was living beyond its means. But the payoff may be coming soon.
Some big changes
- In China, about 400 million people have risen above poverty since the late 1970s. And 150 million of them now have manufacturing jobs -- a group nearly the size of the entire U.S. work force, says Fred Fraenkel, the chairman of investment policy for Beacon Trust. An additional 200 million Chinese should rise above poverty in the next five to 10 years, he estimates. The size of the middle class has likewise been rising dramatically throughout the developing world. "This is moving so fast . . . that it's hard to comprehend," Fraenkel says.
- One way to grasp the big picture is to consider how sharply the emerging-market share of world gross domestic product has risen. Developing economies accounted for 45% of world GDP last year, up from 37% in 2000, says Panait, of investment firm Payden & Rygel. The value of emerging-market contribution to world GDP rose to $30.9 trillion in 2008 from $15.5 trillion in 2000.
- Emerging-market customers are now buying much more of our stuff. Developing countries bought 35% of the $1.3 trillion worth of U.S. exports in 2008, according to Franklin Vargo of the National Association of Manufacturers. That's up from 25% in 1990. China was the largest, with $70 billion in purchases, followed by Brazil, Singapore and Taiwan. They buy agricultural products but also significant amounts of manufactured goods. (See "The myth of U.S. industry's demise" for more.)
Guidance for investors now
It probably also makes sense to buy stocks of companies in these regions despite their big rallies. Hong Kong's Hang Seng Index ($HSI) is up 61% from its low point of this recession; India's stock market is up 75%.
Some potential buys include Chinese education companies, such as China Distance Education (DL, news, msgs), ChinaEdu (CEDU, news, msgs) and New Oriental Education & Technology Group (EDU, news, msgs), and Indian car company Tata Motors (TTM, news, msgs), says Paul Goodwin of Cabot China & Emerging Markets Report, a top-ranked investment newsletter by Hulbert Financial Digest.
Brazilian banks such as Banco Bradesco (BBD, news, msgs) and Itaú Unibanco Banco Múltiplo (ITUB, news, msgs) look attractive as plays on expanding use of consumer banking services, says Will Landers, the portfolio manager of the BlackRock Latin America Fund I (MALTX).
Uri Landesman, the head of global growth strategies at ING Investment Management, likes Millicom International Cellular (MICC, news, msgs), which offers mobile telephone services in Central America, South America, Africa and Asia. "It's the Vodafone Group (VOD, news, msgs) of emerging markets," he says.
The big payoff ahead
- Emerging economies are showing robust growth. India's economy was up 5.8% in the first quarter. China's GDP grew 7.9% in the second quarter. Overall, JPMorgan Chase analysts estimate that emerging Asia's GDP grew by an annualized 7% in the second quarter. The International Monetary Fund projects emerging economies will grow by 4.7% next year, with China and India leading the way at 8.5% and 6.5%, respectively.
"We're convinced that the emerging markets are going to lead the way out of the recession," Panait says.
By themselves, emerging economies can't lift the world out of the doldrums. But rising demand in emerging nations will help get the U.S. back to normal growth sooner than many people expect, Paulsen says.
- The currencies of emerging economies should appreciate against the dollar. Though many Americans think a strong U.S. dollar is important because it allows us to buy more abroad (and as a sign of national prestige), a weaker dollar actually will help the recovery by creating more demand for U.S. goods. A weaker dollar makes U.S. goods cheaper for foreign buyers. Just as important for U.S. growth, Paulsen says, it redirects U.S. consumer spending inward.
Why do the experts think the dollar will weaken against emerging-market currencies? One reason: Robust economic growth in those markets will attract foreign investment, which will drive up demand for their currencies. Next, strong economic growth will create inflation at home. Letting emerging-market currencies appreciate would be a good way to cool off those price increases by reducing foreign demand for their goods, says Axel Merk, who runs mutual funds that bet on currency changes at Merk Mutual Funds.
No guarantees
And many analysts wonder just how "real" the growth is in China, the leader among the emerging-market economies. On a recent visit to Beijing, Columbia University political economy professor Sharyn O'Halloran says she noticed that half of the finished commercial real-estate appeared vacant. The fear is that China's vast stimulus spending has created a lot of construction and production but no consumer demand to buy all of what's being produced, ING Investment Management's Landesman says.
"There may be some truth to that," Panait says. But China has $2 trillion in reserves, from having sold so much to the world over the years. So it can keep spending to hit its 8% annual economic growth targets. "They have the money they need to throw at the economy to be sure growth stays at 8%," she says.
That's thanks, in part, to help from the U.S. consumer. And with slow growth in the U.S. expected for some time, we can only hope that they'll help us right back.