A major influence on consumer spending for a number of quarters now has been the negative influence of the large amount of wealth destruction that has taken place as a result of the decline in both home values and the value of financial assets. Home prices certainly are not on the rise, but the equity market is, and there are implications for the economy.
A rule of thumb that economists use is to expect that for every $1 change in the value of equities, consumer spending will increase by about 3 to 5 cents. The Federal Reserve valued equities at $15.2 trillion at the end of March, and the S&P 500 has gained about 18% since then; that increase, if used as a proxy for the market, would mean a roughly $2.8 trillion increase in wealth. Using the rule of thumb, that's close to $120 billion of consumer spending, or roughly a percentage point boost to GDP.
None of this means that GDP will reach its potential, and the equity market's gains following massive losses, so it is important to not put too fine a point on the idea, but it is difficult to ignore the implication of rising asset values (as well as falling asset values, of course).
P.S. Will you be there when Cramer makes his next move?
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Tony Crescenzi Blog Purchasing Managers Index Shoots Up Again 6/1/2009 10:56 AM EDT Due to the potency of ISM data, today's market movements are unlikely to suddenly reverse.
Tony Crescenzi Blog Treasury Auction Perfectly Average 5/28/2009 1:28 PM EDT Though not as good as yesterday's auctions, the seven-year was in line with past results.
Tony Crescenzi Blog Home Inventories Match 15-Year Low 5/28/2009 11:08 AM EDT People need places to live, so inventory is likely to go even lower.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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