Why Aren't the Fat Cats Spending? Boom and Bust Hits a Forecasting Variable Economists Used to Bank On
Consumer net worth is now a standard input to macroeconomic forecasting models, and recent record highs have added to policy makers’ confidence in the outlook. Since wealth is something households intentionally accumulate through savings to finance future consumption, it wasn’t a key forecasting variable until we entered the era of booms and busts in asset prices. The wealth effect on consumer spending really refers to unanticipated gains in wealth, and it was born in the stock market boom of the late 1990s and became a source of concern during the leverage fueled housing boom. Recently it appears the wealth effect may be losing its potency.