The Wealth Effect
This morning, in a WSJ article titled “Consumer Mojo Lifts Profits,” we read:
“The broadest measure of U.S. consumer spending, the Commerce Department’s personal consumption expenditures, rose at a 1.6% inflation-adjusted annual rate in the fourth quarter. Based on all the latest data on retail sales and the like, forecasters at Macroeconomic Advisers, St. Louis, estimated personal consumption expenditures increased at a 3.6% rate in the first calendar quarter.”
We must admit we have been shocked by the resilience in consumer spending. What we believe we are observing is what is referred to as the “wealth effect.” This is where the rise in asset values, such as stock portfolios, induces a false perception of increased wealth. This confidence boost causes consumers to be more willing to spend. When the bottom drops out, this temporary self-reinforcing cycle reverses its course.
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