Falling Stocks Can Ding The Economy

Corrections cause consumers to keep a tighter grip on their wallets.

- David Payne

A stock market drop is painful for investors, but the aftereffects can be a punch in the gut for the economy overall. A key risk to economic growth in 2019 is that a falling stock market could cause people to pull back on spending, which is ominous, considering that consumer spending has powered nearly three-fourths of the growth during the current economic expansion, according to the Bureau of Economic Analysis. “The correction in stock prices, if sustained, will do some damage to economic growth in 2019,” says Mark Zandi, chief economist of Moody’s Analytics.

Consumer spending has been turbocharged by the so-called wealth effect, an economic yardstick that measures how changes in household wealth affect how much people spend. Given the rise in stock holdings and home prices, the wealth effect has lifted consumer spending, adjusted for inflation, by more than $600 billion during this economic expansion, Moody’s calculates.