The little guy's foray into the capital markets has been blamed for so much in recent years: routine first-day tripling of crummy IPO shares, absurd
price-to-earnings ratios, the dot-com bubble. Can we add prolonged economic stagnation to the list?
Experts say no.
To be sure, there are signs that the precipitous fall in the equity markets has chipped away at consumer spending levels. The index of
leading indicators fell 0.5% in September, the largest one-month drop since January 1996, according to the Conference Board. Falling stock prices counted as the largest negative factor in the fall.
U.S. households, which hold about 35% of their assets in equities, have lost more than $3 trillion in the equity markets since the market peaked in mid-2000. The
has lost about 28.6% since reaching an all-time high of 1527.46 on March 24, 2000. And the latest data from the
Federal Reserve also show that household wealth has been contracting in tandem with the stock market slide. Total assets in the second quarter fell to $48.1 trillion from about $49.4 trillion in the same period last year.
With consumption driving about two-thirds of the economy, the fate of the U.S. consumer has been as closely watched as Roger Clemens' right hamstring. But save any additional protracted downturn in stocks, economists say concerns about the negative wealth effect are overblown.
"I'd argue that just as the wealth effect that caused consumer spending growth in 1998 and 1999 was exaggerated, dampened consumer spending
from the stock market's decline is exaggerated," said Dan Laufenberg, chief U.S. economist at American Express Financial. "The wealth effect has had a dampening impact, but it's not going to be enough to pull the consumer into negative territory."
The pace of increase in consumer spending has fallen in the past two years, but it's still growing, noted Laufenberg. Consumer spending grew at a 5% rate in 1998 and 1999, then moderated to 4.2% growth in 2000. Laufenberg estimated that consumer spending will grow by 3% in 2001, and he's optimistic for a few reasons.
For one, real income growth after taxes has been "quite remarkable" in the past few months, said Laufenberg. Low inflation and more tax cuts would raise the level of disposable income. The Fed's aggressive interest-rate cuts have also encouraged consumers to refinance their housing loans and purchase new homes. "Wealth in your house" has gone up, said Laufenberg, and that has offset the decline in equity wealth.
David Durrant, economist at Julius Baer Asset Management, agrees. "Everything that has been studied shows that consumers are really more susceptible to housing than they are to the erosion in the stock market," he said, noting that the Fed itself hasn't charted a direct correlation between equity losses and spending. When people refinance their homes at a lower interest rate, they have immediate access to "extra income on their finger tips."
On the other hand, most investors aren't stock market gamblers, just proprietors of retirement savings plans or 401(k)s, Durrant said. Given that they can't spend that money till they hit retirement, any movement in the stock market doesn't have a significant impact on spending habits and levels. "I'd argue that, in reality, only a small percentage of people really have exposure to the equity market," Laufenberg said.
Moreover, a recent study that charted the level of savings rate during the stock market boom showed that those in the highest income bracket saved the least and invested the most money in equities, Laufenberg said. Rich people might cut back on some luxury items, but "that's not going to enough to cause the consumer to retrench in a significant way," said Laufenberg.
Still, economists say an extended market slide could ultimately hurt spending levels. "If equity prices continue to erode over the next six to eight months, it'll have a severe restraining impact" on consumer spending, said Anthony Karydakis, senior financial economist at Banc One Capital Markets. Consumer spending collapsed in the quarter following the stock market crash in October 1987, but stocks recovered quickly, said Karydakis. If no corresponding bounce occurs in this cycle, it could mean trouble.
"We're not in a bear market," said Laufenberg. "The market's reacting to a cyclical slowdown in the economy." Moreover, the broad market has gained about 12% since Sept 21, while the
has added some 20%. "The market isn't going up at a 25% or 30% pace, but I think we've priced in the worst-case scenario and that things aren't going to be that bad." As for the consumer, he'll probably be able to "pull the rest of the economy out of its funk," Laufenberg added. "It'll take a little time, but he will
pull it out."