Goldman says rich people will drag down US economy by spending less

[SINGAPORE] The stock-market sell-off is going to be a significant drag on the US economy this year as wealthy households feel its impact, according to Goldman Sachs Group.

Lower equity prices could take half a percentage point off US gross-domestic product growth in 2019, with overall tighter financial conditions restricting expansion by around 1 percentage point, Goldman economist Daan Struyven wrote in a note on Tuesday. In October, he had said the positive wealth effect from equity gains in 2017 and early 2018 had likely evaporated.

"The hit to the wealth level from a 1 per cent decline in stock prices is now about three times larger than in the late '80s for the top-10 per cent of households and a third larger for those in the 50-90th percentiles," Mr Struyven said, citing the increase in equity holdings as a share of disposable household income.

Mr Struyven argued against the idea that the wealth effect from the stock market might be limited due to a higher concentration of stock ownership than in previous decades, and a lower propensity to spend among rich households. To prove that this thesis doesn't hold up, he cited increases in equity holdings, as well as a high sensitivity of luxury-goods spending to stock-market fortunes, as evidence.

That's at odds with a paper from the National Bureau of Economic Research in 2013 that finds "at best weak evidence of a link between stock-market wealth and consumption," and asserts that the housing market has much more of a wealth effect.

The share of personal consumption expenditures spent on jewelry is "highly correlated with moves in the stock market," Mr Struyven wrote in the Jan 15 report.

"Focusing on a sample since 1995, we find large effects of the stock market on luxury spending," Mr Struyven said. Regressions of spending growth on stock price changes confirm a strong relationship "for jewelry and watches, pleasure boats and pleasure aircraft."

BLOOMBERG