Updated Tuesday, July 22, 2014 as of 11:27 AM ET
Wealth Effect Failing to Move Wealthy to Spend
(Bloomberg) -- The wealth effectisn’t what it once was for the U.S. economy.

While the wealth of American households has jumped more than $25 trillion since early 2009 amid rising equity and home prices, the pass-through to consumer spending is lagging the $1 trillion fillip that would have been anticipated historically, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

This means consumer spending has been exceptionally weak once wealth is accounted for, he said. With wealth gains now moderating, consumer spending could revert to what is already a weak trend, Feroli said in an April 11 report.

His calculations show that since the recession ended in 2009, households have spent 1.7 cents of every extra $1 earned in wealth. That’s less than half the 3.8-cent average implied by data between 1952 and 2009, suggesting the trend for consumer spending gains over the past three years has been less than 1% once the wealth effect is stripped out.

One reason for the adjustment may be that those enjoying gains in wealth are already rich, so have less propensity to increase spending incrementally. Withdrawing equity from homes has also been negative for five years.

The good news is that income expectations are starting to pick up, which should encourage the spending acceleration that greater wealth failed to spark, said Feroli, a former economist at the Federal Reserve Board.

Hedge funds may have been to blame for helping spread the financial crisis of 2008.

So argues a study published April 14 by Reint Gropp, a visiting scholar at the Federal Reserve Bank of San Francisco. It attempts to measure how deterioration in financial conditions spreads through various corners of the financial system.

Gropp’s findings show that while the risks to other financial institutions emanating from hedge funds are as small as those from commercial or investment banks in calm times, they are greater during periods of market turbulence.

A 1 percentage point increase in the risk of a hedge fund is estimated to weaken the position of investment banks by 0.09 point in normal market conditions. In times of financial distress, the same shock increases the impact by 0.71 percentage point, according to Gropp.

“There is a growing recognition that hedge funds are systemically important,” he said.   more »

More in Mass Affluent
Esther Stearns is working with financial software maker Guide Financial in its quest to "carry the NestWise torch." more »
A survey of 500 mass affluent investors by an industry association finds -- conveniently -- high awareness and use of nontraded REITs. more »
The path from administrative assistant to bank advisor is just part of Annette Martin’s story. Here, we offer more on her shift to fee business, including when not to do it. more »
Mass-affluent investors in their 40s with $100,000 to $500,000 in investable assets constitute an especially promising target group for bank advisors even with direct providers nipping at their heels. more »
Seeing people come up short with the money needed for a retirement home was sad for one administrative assistant. In her new career she helps such people and produces more than $1 million a year doing it. more »
You've probably heard it's best to wait until age 70 to file for Social Security benefits, if possible. But do you know when it's advisable to wait even longer? more »
America's wealthiest investors plan to increase their use of independent financial planners in 2014, according to a new study from Spectrem Group. more »
If your clients run into one of these guys, they just may leave you to make the change to fee-based. more »
The move is part of a shift of emphasis from life insurance "to a more well-rounded protection and retirement planning approach." more »
Younger millennials carry half the debt of their older peers. more »
Bill Harris shook up the financial services industry as CEO of both Intuit and PayPal. Now he's got his eye on financial advisors. more »
Only 42% of couples who have advisors work with them jointly, according to a new Fidelity study. Here's one way to fix the problem. more »
Banks have aimed their efforts too broadly at the mass-affluent, a diffuse and broad swath of customers. Instead, they should pursue the “rising mass affluent,” a segment with the most potential for accumulating wealth, according to Booz & Company. more »
2014 Summer Reading List for Advisors

Current Issue

The July Issue is now online!


Industry Events

August 10, 2014 |

September 9, 2014 |

September 17, 2014 |

September 20, 2014 |

September 28, 2014 |

Already a subscriber? Log in here