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  • Frank Tian

Inverse Wealth Effect

Even for those without any income loss,

Market slides will lead to less consumer spending.

This CBC piece explains the inverse "wealth effect".

Retailers report weak earnings in the most recent quarter.

Those whose income does not keep up with high inflation have to tap into savings and credit.

However, even for those without any real income loss, their spending is influenced by the slides in housing, stock, and crypto markets.

This is due to the “Wealth Effect”:

  • When people have more wealth, they spend more.

  • When people have less wealth, they spend less.

Note wealth is merely a number on paper, largely driven by market prices.

Nevertheless, the news of market slides greatly impacts consumer psychology.

In May, the consumer confidence index declined further in both the US and Canada, which is a leading indicator of the macroeconomy.

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