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'Wealth Effects' and GDP

By Tony Crescenzi

 About this article:
 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...

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