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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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May 22 2013

Stock Price Rally and the Wealth Effect

Since early April, economic data releases have mostly been worse than expected. However, with a “better-than-feared” jobs report in early May quickly dispelling mounting concerns, stock prices have kept climbing. It is well known that the Fed’s QE policy is intended to boost the prices of stocks and homes, the assumption being that this will induce consumers to spend more money, thereby driving the economic recovery – the so-called “wealth effect.”

While it appears that policymakers now seem anxious to declare victory and start tapering their asset purchases, a key question is whether the U.S. economy has really dodged a recession as many presume? ECRI’s latest study about the cyclical relationships between the prices of equities and homes, and key indicators measuring economic fundamentals, reveals surprising results, and provides clues to  the efficacy of the wealth effect in the current cycle.

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What Wealth Effect?

ECRI May 31, 2013

The latest drop in consumer spending is consistent with the recessionary plunge in yoy U.S. import growth into negative territory. More