The NYT has an interesting article reporting on the falloff in consumer spending in recent months. It notes that many economists were yet again surprised by this downturn. At one point it quotes an economist attributing the falloff to the loss of $6 trillion of household wealth, with $1 trillion in the last week. It is worth distinguishing between the loss of housing bubble wealth, which is likely to be enduring, and the loss of stock wealth, which is likely to prove transitory. Consumption generally does not follow short-term fluctuations in the stock market, so in ordinary times the stock market plunge from last week should not have had an impact on consumption. However, the fact that President Bush and other political leaders, and the media, made such an effort to highlight the stock plunge in an effort to gain congressional approval of the bailout, could result in it having a lasting impact on consumption.
--Dean Baker
