Consumer activity drives about 70 percent of the US economy, making a recovery in consumer spending the primarily driver of improvement all along the US value chain. But how much improvement can we really expect to see with elevated unemployment and little access to lending?

The answer: Quite a bit.

Based on data recently released by the Commerce Department, consumer spending in absolute real dollars is actually at an all-time high, having recovered all of the ground lost during the recession. Retail sales reports show that wallets are opening and in some cases consumers are actually trading back up to more expensive products. And all of this is happening within the context of a weak labor market.

Amazingly enough, this rebound in spending isn’t being driven by debt. Both the consumer debt and savings rate levels are falling, indicating that the cash being spent is coming out of savings rather than borrowings. The consumer debt service ratio–which measures debt payments to disposable personal income–as reported by the Federal Reserve has fallen from a high of 13.92 in the first quarter of 2008 to 12.6 in the fourth quarter of 2009. And last year total outstanding consumer credit contracted by 4.4 percent.

At the same time, the savings rate has falling from a high of about 6 percent at the height of the crisis to around 3 percent today. While I hate to see the savings rate fall, I doubt it will go negative again, since consumer credit availability remains tight and, despite improving confidence, the consumer remains shaken from the experience of the last two years.

That pickup in spending has been driving improvement in other areas of the economy, particularly manufacturing. While the recent downtick in the Empire Manufacturing Index–a measure of industrial activity in the Federal Reserve Bank of New York region–sent a shiver down the spine of many an investor, the reading of 19.1 continues to show expansion and after the mother of restocking stories was running for much of last year, some degree of slowdown is to be expected.

The Consumer Confidence reading released by the Conference Board is currently at 57.9, its highest level in a year. And the Expectations Index has risen from 70.4 in March to 77.4 in April. A slowing pace of layoffs and nice gains in the stock markets, the past month being an exception, has made consumers feel better about their situation and brightened their outlook for the future.

The simple fact is the health of the US consumer simply can’t be discounted. So, given the huge contribution the consumer makes to the US economy, I simply can’t see bailing out of the markets now, particularly if you’re using hedges such as the iPath S&P 500 Short-Term Futures ETN (NYSE: VXX) and SPDR Gold Trust (NYSE: GLD) which I discussed a few weeks ago and have posted gains of better than 23 percent and 3 percent, respectively.

Simply put, unless we have some catastrophic reading on the consumer soon, stay in the markets. You might even want to consider on direct bet on the US consumer with the Consumer Discretionary Sector SPDR (NYSE: XLY).

For more information on hedges, including my current take on gold prices which have hit new all-times highs on an intraday basis, and other ideas on how to play the ETF markets, take advantage of the free 30-day trial that my publisher is offering by clicking here.

What’s New

Trading began in One Fund (NYSE: ONEF) on May 11, a new global fund of funds launched by US One. The fund is currently holding five other ETFs: Vanguard Large Cap (NYSE: VV) which accounts for about 50 percent of assets, Vanguard Small Cap (NYSE: VB) at about 20 percent of assets, Vanguard Europe Pacific (NYSE: VEA) at 20 percent, Vanguard Emerging Markets Stock (NYSE: VWO) at 5 percent, and iShares MSCI EAFE Small Cap (NYSE: SCZ) at about 5 percent of assets. Based on that, the fund is 70 percent invested in the US, 16 percent in Europe, 12 percent in Asia and 2 percent in Latin America.

Using an asset allocation strategy that seeks to maximize returns by overweighting regions which management expects to outperform, I appreciate the fact that US One is using some of the lowest-cost index funds available to build its portfolio. More often than not, funds of funds will use much more expensive in-house offerings to build these types of portfolios. Based on the use of inexpensive index funds, One Fund’s total expense ratio comes in at 0.51 percent.

The best use I can see for One Fund would be for investors who build core portfolios will balanced equity and fixed-income exposure, then overweight particular sectors or countries to generate alpha. With this single holding you would be building in exposure to more than 5,000 US and foreign companies.

That being said, One Fund clearly has a strong bias towards the US market which probably isn’t what most folks using an allocation strategy would necessarily want. Most allocators would likely prefer to use iShares MSCI ACWI Index (NSDQ: ACWI) which offers much better global diversification and is cheaper with an expense ratio of 0.35 percent.

This is US One’s first ETF offering and it will be interesting to see what their future plans hold. There are some merits to the idea and I wouldn’t be surprised to see a line of “one funds” that cover most of the major asset classes.

The other fund launched last week was SPDR Nuveen Barclays Capital Build America Bond (NYSE: BABS) which began trading on May 13. The fund will likely have quite a mountain to climb though since it doesn’t have the advantage of being the first entrant to that particular market.

Invesco PowerShares launched PowerShares Build America Bond (NYSE: BAB) last November and the fund has already accumulated more than $300 million in assets. It also sports a slightly lower expense ratio of 0.28 percent versus 0.35 percent for the SPDR fund.