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Rising stock prices accounted for nearly two-thirds of the rebound in wealth through the end of 2012, the St. Louis Fed report estimates. The increase in stock prices has extended well into 2013, despite sharp declines the past two weeks. In the January-March quarter, gains in stocks and mutual funds accounted for about half the nation's $3 trillion increase in wealth. Rising home prices made up about one-fourth. The rest came from higher pension fund reserves, greater ownership of cars and other goods and lower debts. Homes accounted for two-thirds of middle-class assets before the recession, estimates economist Edward Wolff of New York University. Stocks made up just 7 percent. Roughly half of Americans own stocks, directly or through mutual funds. But most of their holdings are small. As wealth has risen this year, many people have chosen to save less of what they earn and keep spending. Americans saved just 2.5 percent of their income in the first quarter. That compared with about 4 percent last year. "People feel wealthier, so they're happier to spend more," says John Calverley, head of macroeconomic research at Standard Chartered Bank. "There is also a broad confidence effect. It's not just in terms of consumers. Businesses see a higher stock market and feel more confident about investing." Economists worry that with more wealth accruing to richer households, the wealth effect may be muted. That's because affluent Americans are less likely to spend additional wealth than middle- and lower-income Americans are.
On the other hand, richer households drive a disproportionate amount of consumer spending. So their recovered wealth will still likely boost overall spending. Fed policymakers "are relying on the wealthy to spend and send their resources trickling down through the economy," Saporta says.
[Associated
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