As we move into the holiday season, the economic news
continues to be increasingly cheerful. National statistics are
signaling an accelerating pace of economic activity based on strong
overall economic growth, a falling unemployment rate, and rising
consumer confidence. One of the major concerns going forward is
whether consumers will be able to sustain the current pace of
spending.
This same worry, albeit compounded, occurred in early 2000. At that
time, the NASDAQ average reached a quarterly peak of 4,403. After a
stunning stock market rally that lasted several years, things began to
come unglued in March of that year. When the NASDAQ began to implode,
it was generally presumed that consumer spending would collapse as the
result of the “wealth effect,” where capital losses in the stock
market would force consumers to buy less because of their reduced
wealth. To some extent this did occur, but not by as much as many
thought at the time. Why? Because while stock market wealth matters in
determining consumer spending, so too does home equity. And, for many
consumers, home equity wealth affects their overall wealth far more
than do stock market losses. This has been especially true for Rhode
Islanders.Since the 1980s, home prices
here have continued to rise. But, they failed to keep up with
inflation for a number of years, resulting in continual declines in
real (inflation adjusted) home prices (see graph).
Ironically, this situation reversed at just
about the same time the NASDAQ began its long decline (see graph
below). So, in Rhode Island,
rising home equity wealth offset some if
not a major portion of the stock market losses. The result: Consumer
spending here did not falter much, even as the stock market was
declining precipitously.
What about now? As we move into this holiday
season, not only are real home prices in Rhode Island rising sharply,
continuing the trend that began in early 2000, but the stock market is
moving upward as well, a combination we haven’t seen since the
beginning of 2000. This double-barrel increase in wealth should help
Rhode Island offset some of the weakness in income and employment that
may occur in the next several months. |
