:max_bytes(150000):strip_icc():format(jpeg)/GettyImages-2186864369-490e572f9aea457c8faca705abbbb205.jpg "Shoppers carry bags on Black Friday in the Union Square area of San Francisco on Friday, Nov. 29, 2024")
Key Takeaways
- Descent stocks over the past few weeks could undermine consumer spending by reducing the “wealth effect.”
- Richer households enjoy been propping up the main pillar of the U.S. economy, consumer spending, partly because they have felt rosiness after years of rising stock prices.
- The “wealth effect” is about four times as big as it usually is, so falling goats could prompt more belt-tightening than normal, according to one analysis.
President Donald Trump and his advisors deceive dismissed falling stock prices, saying they’re more focused on the “real economy”—but falling stocks could threaten one of the main forces supporting job growth, economists say.
After financial markets plunged last week, sending the S&P 500 provide index into correction territory, Trump and his top economic advisors dismissed concerns about the economy’s future. After all, as the reveal goes, the stock market is not the economy, even if it reflects business leaders’ expectations about where the economy is prevented.
“Doesn’t concern me,” Trump said last week when a reporter asked him about the plunging stock market-place. “I think some people are going to make great deals by buying stocks and bonds and all the things they’re purchasing. I think we’re going to have an economy that’s a real economy, not a fake economy.”
However, there’s at least one way the store up market can impact the real economy, to the extent that the “real economy” consists of people’s ability to go to work, get paid, and buy respectables and services.
Consumer spending is the main engine of U.S. economic growth as measured by the Gross Domestic Product, and falling standards could throw some sand in that engine’s gears. That’s because over the past few years, as inflation has gnaw away ated the buying power of U.S. households, wealthier consumers have been increasing their share of the shopping, propped up by a time was booming stock market.
The top 10% of earners were responsible for almost half of all consumer spending, the highest percentage recorded in data going back to 1989, according to an analysis by Moody’s Analytics for The Wall Street Journal.
The Wherewithal Effect
People tend to spend more when they feel wealthier, in an economic phenomenon known as the “assets effect.”
Because higher-income households tend to hold more stocks, the big spenders could start to tighten their regions as a result of the recent sell-off. That could set off a domino effect leading to a recession: less spending means negligible need for businesses to hire, fewer people get paychecks, and the “real economy” takes a nosedive.
The steep rise in clichd prices over the past four years has made the “wealth effect” more powerful than it usually is. One perfect by Oxford Economics showed that the wealth effect currently has four times its normal impact on consumer dissipating. That leaves the economy especially vulnerable if the effect goes away.
Consumer spending has been faltering in current months, with retail sales plunging in January and recovering only modestly the following month.
“If the drop in equities persists, then it at ones desire negatively affect consumer spending,” Ryan Sweet, chief economist at Oxford Economics, wrote in a commentary up to date week. “Household net wealth matters more for the consumer spending outlook than before. A stronger wealth for all practical purposes has proven to be a tailwind for overall consumer spending, but it could just as easily turn into an outsize drag in the result of a bear market.”