A frothy stock market is boosting consumption by wealthy U.S. households, offsetting the weakness among lower-income households that are facing a deteriorating job market, says National Bank Financial Inc. (NBF).
In a research note, economists at NBF explored the apparent resilience of the U.S. economy, despite the weakening of key indicators, such as employment.
While economists agree that the so-called “wealth effect” exists — higher stock prices boost consumer spending — the size of that effect varies between different economic models, ranging from about 2¢ per dollar of equity gains to 10¢ per dollar, NBF said.
What’s more certain is that “this effect has increased in recent years as households’ exposure to the stock markets has grown,” it said. The share of household assets allocated to stocks reached a record high of 45.4% in the second quarter, it noted, “up 12 percentage points over the past 10 years.”
And, these gains are concentrated in high-income households, it said, with the top 20% of households (by income) holding 86.9% of all stocks and mutual funds.
“It is this concentration that partly explains the current resilience of consumption,” NBF said — as the top 20% of households account for almost 40% of total household consumption, outweighing the combined total for the bottom 60%.
These high-income households also generate more than a quarter (26.8%) of total U.S. GDP, it noted.
As a result, “it is easy to understand how the increase in the wealth of the richest can overshadow the pessimism of the majority of households when it comes to economic growth,” the report said.
“While poorer households may currently be responding to the deterioration in labour market conditions by reducing their spending, this restraint is probably more than offset by an increase in outlays among the wealthiest households, whose total revenues are much more dependent on market performance,” it noted.