Wealth Effect Drives U.S. Consumer Spending Amid Economic Uncertainty

Wealth Effect Drives U.S. Consumer Spending Amid Economic Uncertainty

Bernard Yaros, lead U.S. economist at Oxford Economics, explained in a recent report that gains in net wealth have played a significant role in driving consumption since the pandemic. "Wealth effects have become even more pronounced over the past 15 years, with stock market gains now outpacing housing wealth in their influence on consumer behavior," Yaros said.

One key factor contributing to this surge in consumer spending is the growing excitement around artificial intelligence (AI) technologies, which has boosted stock prices of tech companies. As these stocks climb, the wealth effect intensifies, encouraging greater consumer spending. Over the past year, this trend has been particularly noticeable in the tech sector.

Regional differences also shape the wealth effect's impact. In areas like the Northeast and South, where both stock and housing wealth have risen, the wealth effect is especially pronounced. This regional variation highlights how local economic conditions can influence overall consumption patterns.

Oxford Economics forecasts that U.S. consumer spending will grow by approximately 2% in 2025, down from around 3% in 2024. Despite the slowdown, the wealth effect is expected to remain a major contributor, accounting for roughly three-quarters of the overall increase in spending.

The impact of changes in net wealth is most evident in the purchase of discretionary goods and services, such as vehicles, recreational products, and household furnishings. As households' financial positions improve, they are more likely to spend on non-essential, big-ticket items, driving the broader economy forward.