Prepared by The Northern Trust Company
(November 22, 2000) In this new era, households are getting wealthier the new-era way--via asset inflation. Check out Chart 1. It shows holding gains on household assets as a percent of the change in household net worth. To smooth the data and to show just how much more important holding gains on assets are to increases in net worth in recent years, I have taken the 20-quarter cumulative dollar change in holding gains as a percent of the 20-quarter dollar change in household net worth. From the late 1950's through the early 1990's, asset holding gains as a percent of changes in net worth were contained in a range from 45.7% to 72.5%. But notice what has happened starting in the second half of the 1990's. Holding gains as a percent of changes in net worth shot up from the low 70's to the low 90's. In the past five years, households have seen their net worth skyrocket not the old-fashioned way--by saving or investing a portion of their current income--but rather the new-era way--by enjoying massive capital gains on assets previously accumulated the old fashioned way. Although holding gains on real estate have played a supporting role in increasing household net worth, clearly the star of the show has been the record-breaking bull run in the stock market.
Chart 1
Households: Holding Gains On Assets As Percent Of Change In Net Worth
(Based On 20-Quarter Moving Totals)
Has this new-era way of getting wealthier affected the relationship between household spending and the stock market? It would appear so. Chart 2 shows the quarter-to-quarter percent changes in the NASDAQ composite stock index and personal consumption expenditures from the second half of the 1970's through the first half of the 1990's. Although there is a positive correlation between the two, at 0.24, the relationship is weak.
Chart 2
Now, let's take a look at the correlation in the past five years--a period in which asset inflation has been the main driver of increases in household net worth. As shown in Chart 3, the positive correlation between changes in the NASDAQ index and consumption spending has jumped all the way up to 0.75. The data suggest, therefore, that as households have enjoyed high and sustained capital gains in the stock market, they have tailored their spending patterns more closely to the ebbs and flows of the hallmark of the new era--the NASDAQ stock index.Sources--Wall Street Journal, Bureau of Economic Analysis/Haver Analytics.
Chart 3
Here's the 64-dollar question. If the NASDAQ or a broader index of stock prices should keep on its southerly course for some time, will household spending follow in a major way? My bet is that it will.Sources--Wall Street Journal, Bureau of Economic Analysis/Haver Analytics.
November 22, 2000 Paul Kasriel The Northern Trust Company 50 South LaSalle Street, Chicago, Illinois 312-630-6000