This "Fed study" illustrates the Fed believes the stock market IS the Economy and they will thus attempt perpetuate another bubble IMO.
Wealth effect boosted US GDP in '95-99-Richmond Fed
(REUTERS)
WASHINGTON, Oct 10 (Reuters) - Increased consumption
sparked by double-digit rises in U.S. stock prices in the
second half of the last decade added 1 to 2 percentage points
to U.S. economic growth per year in that time, according to a
new study from the Federal Reserve Bank of Richmond.
Richmond Fed economist Yash Mehra found that for every $1
increase in equity prices, consumer spending rises by 3 to 4
cents over the long term.
The so-called "wealth effect" has been garnering close
attention in the aftermath of a sharp correction in U.S. stock
markets in the past 18 months.
From 1995 to 1999, household equity wealth rose at an
annual clip of 18 percent per year, boosting consumption and in
turn, gross domestic product (GDP). But in 2000, that wealth
fell about 18 percent, Mehra noted. Stock prices have continued
to fall in 2001, meaning the so-called "wealth effect" will not
be contributing to GDP growth, he said.
"A persistent decline in equity wealth can lead to lower
consumer spending," Mehra wrote in a recently released paper.
"Hence, the growth rate of consumer spending in the near
term is likely to fall below the robust 4 percent yearly growth
rate observed during the preceding five-year period," he said.
Mehra said of the 4.0 percent consumption growth rate seen
on average per year from 1995 to 1999, the stock wealth effect
contributed 1.5 percentage points.
"Even with relatively low estimates of the marginal
propensity to consume out of stock market wealth, the
consumption effect of the 1990s stock market boom is
substantial," he wrote.
Mehra, however, said in an interview that he did not find
evidence of a so-called "negative wealth effect."
Some analysts have questioned if a decline in stock prices
not only means that there will not be equity price-induced
consumption gains, but that the psychological effect of
watching stock portfolios shrink causes consumers to scale back
spending. Thus, they say, stock price declines have a negative
effect on spending.
That debate has continued in 2001 as stock prices have
steadily dropped throughout the year. Since the beginning of
the year, the Dow Jones industrial average <.DJI> has fallen 16
percent while the tech-heavy Nasdaq Composite Index <.IXIC> has
dropped more than 36 percent.
((Barbara Hagenbaugh, Washington newsroom, 202-898-8370, fax
202-898-8383, washington.economic.newsroom@reuters.com))
REUTERS
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