NCPA - National Center for Policy Analysis

After The Boom, What Happens To Spending?

May 25, 1999

History cautions that no economic boom lasts forever. While some economists see no end to happy days ahead, the possibility of a serious stock market downturn cannot be discounted.

Ever-higher stock valuations have helped propel and sustain consumer spending. If markets receive a nasty jolt, will spending dry up?

  • In March, real personal spending rose 5.6 percent, year over year.
  • Joseph Abate at Lehman Bros. estimates that the current bull market has added about $7.2 trillion to household income.
  • Several studies have indicated that every $100 increase in household assets prompts an additional $5 worth of spending.
  • Consumers have also been borrowing more to support higher spending -- obtaining larger loans on the basis of their stronger balance sheets.

Economists think that the sectors of the economy most benefited by strong spending have been services and housing. While a short market downturn of 20 percent or so probably wouldn't impact spending, a prolonged slump could, they say. But it might take several years before consumers adjusted their behavior.

Source: Charles Oliver, "After an Eight-Year Bull Market, What Happens If Stocks Decline?" Investor's Business Daily, May 25, 1999.

 

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