Soaring Stock Market, And Housing Rebound Means The Wealth Effect Is Back!

happy home homeowners homebuyers

Evidence continues to pile up that the economy is on the mend — jobs are being created, consumers are starting to spend again — even if it is just steroid or sugar-induced, and thus destined to end in another crash.

One reason for this: the wealth effect is coming back.

Kelly Evans at WSJ explains:

Spending growth has since resumed—a source of surprise and widespread scepticism given the steep contraction in consumer credit and the high 9.7% unemployment rate.

The wealth effect, or the confidence boost that comes when people’s assets rise in value, helps explain this puzzler. Household net worth rose by about $5 trillion through September from its first-quarter trough, aided by the stock-market rebound and stabilisation in home prices across much of the country. Thursday’s flow-of-funds report is expected to show a further increase during the last three months of 2009.

Our guess is that the rebounding market has done a lot more for consumer confidence that the housing market, which, frankly, still remains in the toilet. On the other hand, that’s a reason to be optimistic. If that market turns around sometime in 2010, that’s another shot of “stimulus” for the consumer still bottled up.

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