Consumer Spending Follows Stock Market.

• Position: Brief Article

When stock prices dropped in April and May, consumer spending also dropped. Was this a coincidence, or does it show that stock prices--and the wealth that people have tied up in stocks--can determine the course of consumer spending? The wealth effect is an issue greatly debated by academic economists. Moreover, policymakers such as Federal Reserve Board Chairman Alan Greenspan have stated their concerns about ballooning stock market prices. The evidence implies that there is a wealth effect related to owning stocks, so that the recent surge in stock prices may have offset the...