Negative wealth effects to weigh on U.S. consumption: Bank of America

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Xinhua News

29th November 2022 – (New York) Negative wealth effects resulting from lower valuation of assets would weigh on consumer spending and contribute to an economic slowdown in the United States in 2023, according to Bank of America (BofA) on Monday.

“We could see some negative wealth effects on the balance sheets of consumers,” said Michael Gapen, chief U.S. economist with Bank of America, noting that equity markets have been down generally over the last 12 to 18 months and home prices are now starting to fall.

The United States would see a consumer-led slowdown sometime next year following the current slowdown led by investment, said Gapen at an online briefing by BofA.

Over the past four quarters, declines in financial wealth have largely been offset by increasing real estate wealth, leaving household net worth largely unchanged, according to a recent report by BofA Global Research.

“Looking ahead to next year, our outlook for declining home prices and the potential for weaker equity market performance may lead the average household to prefer a higher saving rate over a lower one, softening spending in the process,” said the report.

“The wealth effect could be more pronounced than what we’ve seen in prior cycles,” said Savita Subramanian, head of U.S. equity and quantitative strategy with BofA Securities, as over 22 trillion U.S. dollars of wealth have been destroyed for U.S. investors so far this year and individual investors became more exposed to the market in recent years.

The 22 trillion dollars lost in equities, bonds, cryptocurrency, real estate and others so far this year would represent about a hit of 700 billion dollars to consumption, which accounts for about 4 percent of total U.S. consumption, said Subramanian in a recent report.

Moreover, Gapen estimated that some of the excess resources owned by U.S. consumers would run out in the first half of 2023. Monetary tightening by the Federal Reserve also would slow down consumption, Gapen said.

U.S. households still have about 1.1 trillion dollars of excess savings which could be tapped for another ten to 12 months to help smooth consumption in the face of the shock to real income, according to BofA.

The U.S. economy would undergo a mild recession in 2023 with negative quarter-on-quarter real GDP growth in the first three quarters of next year, according to the latest forecast by BofA. 

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