The Wealth Effect and How It Affects Our Spending
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- geneonlbk
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The "wealth effect" is a term used to describe consumer behavior that is influenced by rising asset prices. Asset prices can be stocks, bonds, real estate, etc. When your 401(k) statement shows a larger and larger bottom line, it makes you feel good about your current situation and future. When you feel good, you borrow and spend more. The same is true for rising real estate prices. In the case of real estate, you can even tap into the gains in the form of a home equity loan. Home equity makes people feel good. When people feel good they borrow and spend more. Consumer spending accounts for about 70% of our economic output.
"In the late 1990s, when the stock market was booming, the wealth effect was estimated to be about 3 percent to 5 percent. That is, for every $100 in stock appreciation, the typical investor would spend an extra $3 to $5. Recent studies suggest that the effect is even more pronounced with expanding housing wealth, as much as $9 per every $100 in equity. The downside, of course, is that declining values can put the brakes on consumer spending."
The Link is to an informative article that helps define what is happening in the American economy right now.
"In the late 1990s, when the stock market was booming, the wealth effect was estimated to be about 3 percent to 5 percent. That is, for every $100 in stock appreciation, the typical investor would spend an extra $3 to $5. Recent studies suggest that the effect is even more pronounced with expanding housing wealth, as much as $9 per every $100 in equity. The downside, of course, is that declining values can put the brakes on consumer spending."
The Link is to an informative article that helps define what is happening in the American economy right now.
