"Today, every 1% increase in stock wealth translates to a 0.05% uptick in consumer spending, according to a note last week from Oxford Economics lead U.S. economist Bernard Yaros. In other words, a $1 increase in stock wealth leads to a $0.05 marginal propensity to consume, up from less than $0.02 in 2010. Meanwhile, every $1 increase in housing wealth leads to a $0.04 bump in consumption, up from $0.03."
""As households see their wealth rise, they turn more sanguine about their personal financial situation and are more inclined to loosen their purse strings," Yaros wrote. "Increases in wealth will also propel spending by allowing homeowners to extract more equity from their houses or to liquidate appreciated stocks to fund their current consumption." He sees the wealth effect sending the marginal propensity to consume even higher in the coming years because retirees will comprise a bigger share of the population."
Rising stock and housing wealth now exert a stronger influence on consumer spending, making financial market gains more impactful on the broader economy. Every 1% increase in stock wealth corresponds to a 0.05% rise in consumer spending, up from under 0.02 in 2010. Each $1 increase in housing wealth raises consumption by about $0.04, up from $0.03. Wealth gains encourage households to feel more secure and to withdraw equity or sell appreciated assets to fund purchases. An aging population with higher net worth and faster sentiment responses via digital media are expected to boost this marginal propensity to consume further.
Read at Fortune
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