Wealth effect, consumer spending and recession

How much is consumer spending likely to fall as a consequence of stock and home price declines? If we assume a $10 trillion decline in housing and equity wealth, and a wealth effect of .04, we arrive at a decline in consumer spending of $400 billion. So, roughly 2-3 percent of GDP.

Even if we get the financial crisis fixed, we can expect a serious recession.



The figure (click for larger version) is from this 2005 paper by Case, Quigley and Shiller. Their analysis suggests a (housing) wealth effect of about .04