RPT-COLUMN-Who needs US economic data when you have Wall Street?: McGeever

(Repeats column that ran on Monday, with no changes. The opinions expressed here are those of the author, a columnist for Reuters.) By Jamie McGeever ORLANDO, Florida, Oct 6 (Reuters) – The U.S. government shutdown is delaying key economic data releases, thickening the fog of uncertainty for policymakers and businesses, but they needn't worry. They still have access to one of the best economic indicators: the stock market. That may sound flippant, but the connection between U.S. equity prices, consumer spending and economic growth is strengthening. By some measures, it has never been stronger. This helps explain one of economists' big 'misses' this year: stubbornly resilient U.S. consumption. They seem to have underestimated the powerful, positive feedback loop of gravity-defying strength on Wall Street and consumer spending, the so-called wealth effect. U.S. households have rarely been richer and have never had so much of their wealth in the stock market. The epic rally in equities is therefore making a lot of Americans feel a lot richer, increasing their propensity to spend. This is particularly true of the wealthiest households, who account for an outsized share of consumer spending. The Federal Reserve's national financial account figures for the second quarter, the latest available, are revealing on this measure. Total household net wealth rose by $7.09 trillion, the third-largest increase on record, with rising equity prices contributing an eye-popping $5.51 trillion to gains in household wealth during the period. This reflects the fact that equities' share of total household assets has risen to a record 31%, or more than 45% of households' financial assets, another record. Considering the sheer size of these figures, it's reasonable to assume that the 'wealth effect' is one major reason why Americans are continuing to spend. BIG SPENDERS Economists are questioning the resilience of this consumption, however, as the U.S. labor market is showing signs of creaking, if not buckling. Job growth has essentially ground to a halt, and while this may partly be a consequence of reduced immigration, it still isn't something typically associated with robust household consumption. Yet economists at TD Securities – who share concerns about the weakening U.S. job market – still expect consumer spending to accelerate in the third quarter to a 3.2% annualized rate, from 2.5% in the second, raising their GDP growth forecast to 2.8% from 2.2%. What explains this seeming incongruity? Namely, the rich, who largely thanks to roaring equity markets, keep getting richer. Consumption may always be driven by the wealthy, but that's especially true today. The richest 10% of Americans account for around half of all consumer spending, which itself represents around 70% of all U.S. economic activity. And the richest of all – the top 0.1% of households – saw their share of total household wealth rise to a record 13.9% in the second quarter, a period in which the S&P 500 rose 10.5% and the tech-dominated Nasdaq rose 17.5%. These indices rose another 8% and 11%, respectively, in the third quarter, indicating that households felt even richer than they did in the second. Rich enough to keep on spending liberally? The answer is likely "yes." Economists at Goldman Sachs reckon that positive wealth effects may be strong enough to support consumer spending growth over the next year, especially after it gets a boost from the Trump administration's tax cuts. Goldman estimates quarterly annualized consumption growth was around 0.3 percentage points in the July-September period and will be around 0.2 percentage points over the next year. That's assuming equity prices rise in line with nominal GDP growth. If equity markets keep booming, consumption could eclipse economists' expectations yet again. REASONS TO BE CAUTIOUS Of course, the 'wealth effect' is no guarantee of an uninterrupted consumption boom. While actual spending remains fairly healthy, consumer confidence is low, near the lowest on record, in fact, according to the University of Michigan's sentiment index. But that's the confidence of the average consumer, not the richest who keep seeing their stock portfolios appreciate. And as TS Lombard's Dario Perkins points out, the savings rate should fall when net worth rises, as consumers take out cash and spend. That's not happening now – the savings rate is low at around 5%, but it has barely moved for the last few years. Finally, stocks could stop defying gravity. Claims that we're reaching a market top have been growing lately. But as long as optimism about artificial intelligence remains elevated and U.S. tech companies continue recording strong earnings, that long-awaited correction will stay just out of reach. That's good news for U.S. equity holders, and, on balance, the economy as a whole. (The opinions expressed here are those of the author, a columnist for Reuters) (By Jamie McGeever. Editing by Susan Fenton)

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