The stock market has been going up. So have home prices. Will the rising wealth effect give the economy a much-needed boost?
You bet, said Paul Dales, senior U.S. economist at Capital Economics, in a client report Thursday. He notes that the rise in stock and housing prices last year puts household net wealth on track this year to top its previous peak reached five years ago before the recession took a bite out of most U.S. households' bottom line. (Dales estimates household wealth will rebound to $65.1 trillion when fourth-quarter 2012 data are released in early March.) Rising wealth could boost 2013 economic growth, or GDP, by about 0.7%, he adds.
"This wealth effect," Dales wrote, "should continue to boost the economy in future years, too." The wealth effect, of course, is a term to describe the increase in spending and economic activity due to a perceived increase in one's financial security.
A housing renaissance, however, would provide a bigger growth bump than a continuation of the raging bull market on Wall Street, he says. Dales cites a working paper from the National Bureau of Economic Research that estimates a 10-cent boost in consumption for every $1 rise in housing wealth. In contrast, every $1 rise in stock market wealth only boosts consumption by 2 cents.
While rising asset prices are built into his 2013 forecast, Dales says rising household wealth will support consumption later this year, after a hit to spending early in 2013 due to the end of the payroll tax holiday.
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