Another critical tailwind to consumer spending has been rapidly rising asset prices—most important, stock and house values. Stock prices are up a robust 20% over the past 18 months, despite the recent market correction, and 300% since their nadir during the recession. House price gains have also been impressive, rising a robust nearly 10% to new highs over the past 18 months, and 40% since their nadir five years ago. The resulting increase in household wealth has supercharged consumer spending via the so-called wealth effect—the impact on consumer spending of changes in household wealth.
Weighing the wealth effect
The importance of the wealth effect has significant implications for the economic expansion. With stock prices now seemingly richly valued and house prices fairly valued, further outsize gains in asset prices appear less likely. If consumers are to continue spending as strongly as they have been, stronger wage gains will be needed. Moreover, the real possibility of a correction in the stock market, particularly as the Federal Reserve normalizes monetary policy, poses a meaningful threat to consumers and the broader economy.
The whitepaper quantifies the wealth effect based on data on household stock and financial asset holdings from Equifax and retail sales estimates based on Visa credit and debit card data that are modeled to represent all forms of payments, including cash and checks. These data are available for states and metropolitan areas, and thus provide numerous data points to refine our econometric estimates of the wealth effect. We examine differences in the wealth effect across retail spending categories, the lags in the wealth effect, and possible asymmetries in the wealth effect due to rising versus falling asset prices.