In 2007, the SF Fed published an interesting paper on the impact of wealth on consumption across different age groups. The paper found that only housing wealth had a positive effect on consumption, and only at a statistically significant level for those older than 55. Financial wealth did not have much of an impact on consumption across age groups.
This of course explains much of the reason why US consumption from 2000-2007 remained robust despite falling real income. It also suggests, however, that the effect of additional Fed stimulus on the economy (as compared to the stock market) here will be minimal, given that 1) higher stock prices does not increase consumption and 2) the effect of monetary policy on house prices appears broadly played out.
In the near term, this suggests that there are additional upside risks for the US given recent housing data. But longer term, the outlook is less bright. As the baby boomer ‘bulge’ in the demographics profile moves on, the housing wealth effect for the country as a whole will decline. This supports the hypothesis that the effect of monetary policy on consumption growth is likely to continue to fall, ZIRP notwithstanding. In other words, over time, US growth will be even more dependent on increases in real average income, which appears beset by structural problems.
- US Pending Home Sales jumped to 15% YoY in July vs 11.1% exp and 8.4% prev. On a 12 month basis, this is the highest growth level since the tax credit in 2010 and before that the frenzy in 2004:
- The UK deputy PM, Nick Clegg, called Wed for an “emergency tax” on the country’s wealthiest citizens to help fight an “economic war”. Clegg suggested a tax be placed on “wealth” instead of income as there were no plans to change the top 45% rate – Reuters
- Wed: South Korea PMI
- Thurs: German Unemployment, EU Industrial Confidence, US Personal Spending, PCE Deflator, Jobless Claims, Japan PMI, CPI
- Fri: Jackson Hole, Month End, Italy Unemployment, EU CPI, Unemployment