11/08/2010 04:22 pm ET Updated May 25, 2011

Where the Action Is: Consumer Spending

I research and write about economic realities in the interconnected world and their implications for you and your business. I first discovered, in 1983, when I joined the Kellogg Alumni Council, that business school professors provide inspiration, analysis and thoughtful insight into the nature of business. You may be surprised that academia is relevant in these fast-paced and uncertain times. I have learned from them how to rely on quantitative and behavioral research to provide a deeper understanding of what I read in many media outlets. The headlines focus on conflict and controversy, not what happens during the rebuilding process. While professors research and consult, business men and women create and grow businesses. We all succeed by going where the action is. Let's look at where the action is for consumer spending.

Current Consumer Spending

The largest component driving the U.S. GDP is consumption. In the last ten years, GDP has been comprised of roughly 70% consumer spending, 15% of exports to other countries, 10% of direct investments, and 5% of government purchases. Today, as some signs indicate an easing of the recession, U.S. consumers continue to hold back from spending. The most recent GDP information for the first half of 2010 shows that Exports increased 10% over last year. Direct Investments have increased 28%, Government Purchases increased by 1%; but, Consumption increased only 2%. Consumers will not be spending at their previous levels for a host of reasons. In fact, according to the President's economic report in February:

The growth that preceded the recession saw high consumption spending, low private saving, excessive housing construction, unsustainable run-ups in asset prices (especially for assets related directly or indirectly to housing), and high budget and trade deficits. That path was unstable -- as we have learned at enormous cost -- and undermined long-run prosperity. Thus, as the economy recovers, a rebalancing will be necessary.

The model used in the report indicates that three factors drive the tradeoff between savings and spending. The higher the sense of wealth, the lower unemployment expectations, and the greater the ability to borrow (and pay back), the more people will spend. The recent stock market rallies and the lowest interest rates in decades suggest some optimism for spending. And, importantly, the GDP is growing at 2.7% and not contracting. Jobs will return in those areas that support exports and direct investments. But, the largest engine for the US GDP is stalled due to consumers' sentiment about unemployment and their pressing need to pay down their current debt levels. According to a government report released November 1st, U.S. consumer spending rose by less than expected in September as income fell for the first time in 14 months. Inflation remained minimal.

Other Countries' Consumer Spending

The news for major developing countries is quite different. Consumer confidence and purchasing behavior indicators in Brazil, Mexico, Taiwan, and Hong Kong are growing strongly (between 1 to 4%) and those of India and China are growing even faster (more than 5%). Each quarter, The Nielsen Company publishes the state of the global consumer and purchasing behavior. Included in this scorecard is the level of advertising spending, a leading factor in consumer spending. The key learning from this data is that the consumer is cautious; but, longer term, with 30 of 31 countries showing positive ad spending in the 2nd quarter of 2010, global consumer spending may receive a boost. Consumers respond to innovations and promotional activities.

Tapping into Consumers

Global companies continue to innovate. For example, DuPont launched more than 1400 new products in 2009, a 60% increase from 2008. The company filed more than 2,000 patents -- its highest number in its history. Sales from emerging markets of $8 billion exceeded 2007 levels and are projected to grow at a 14% annual compounded growth rate to 2012.

New companies also are discovering that consumers will spend money on items that they find innovative. The founder Robert Croak of the company selling Silly Bandz states: "I came across a product that a Japanese designer had created for an industrial design contest. I thought it would be really neat if we remolded it, made it thicker, larger and into a fashion accessory -- and that's how Silly Bandz was born." Knowing "where the action is" helps management to focus on new business opportunities. One of my colleagues, Roger Schmid, recently gave a lecture and wrote about Brazil, where he works with consumer companies which you can find on our website The only way to capitalize on this knowledge of which markets are growing is to be agile and nimble. This means knowing how to adjust your plans of action to find new consumers for your products. Of course, while you are in the markets, keep your eyes open for new competitors and innovative ideas.