NCPA - National Center for Policy Analysis

Market Downturn May Undermine "Wealth Effect"

December 4, 2000

Some economists theorize the mounting financial assets of households have sent consumers on spending sprees -- further fueling the booming economy. Now they are wondering if falling stock prices will prompt consumers to pull in their horns and buy less -- contributing to a further downturn.

  • Between 1954 and 1994 household assets increased on average 3.2 percent a year.
  • But between 1994 and 1999, they jumped on average 8.5 percent annually, adjusted for inflation -- an extraordinary increase which may well have fueled the consumer buying binge.
  • Experts now predict that household asset values will decline by perhaps 1 percent this year.
  • Financial instruments such as stocks and bonds have expanded from 30 percent of total household assets in 1954 to 54 percent in 1999.

The ratio of households' debts to assets stood at 8.2 percent in 1954. By mid-2000 it had reached 14.4 percent.

These are some of the reasons economists are watching consumer spending patterns -- and stock levels.

Source: Peter Brimelow, "The Sudden-Wealth Effect," Forbes, December 11, 2000.

 

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