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January 24, 2008

Wealth and spending

One of the concerns about the struggling housing market is that as prices potentially drop, so too will consumer spending. And since spending by consumers accounts for 70 percent of total economic activity, if consumers sneeze, the economy can catch cold, something you economists call a recession. What about this worry? Is it legitimate? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It is, but we need to look at the numbers to see how much of a worry this is. Now, the growth and wealth in people's homes has actually slowed to virtually nothing in the most recent data. But the good news is that wealth from other sources, like the stock market and other kinds of investments, has been rising enough to cause total household wealth to still go up.

"So we've not actually seen a decline in total household wealth, although the housing market has stalled. Now, another good piece of news is that studies show that any decline, if we did have a decline in household wealth, actually takes a while to effect consumer spending, maybe up to two or three years. So if we do have a decline, say in 2008, in household wealth, which could potentially affect consumer spending, that adverse affect on consumer spending probably won't show up until 2010 or 2011. So the bottom line is that household wealth is important to consumer spending, but I think a much bigger and more important factor behind consumer spending is jobs."

Posted by Dave at January 24, 2008 08:03 AM