US consumption fueled by stock valuations, creating vulnerability
US consumption showed unexpected resilience in 2025, partly driven by rising financial asset prices. This dynamic, while contributing to the US-euro area divergence, exposes US households to potential market corrections.
Wealth effects drive consumption
US consumption demonstrated unexpected resilience in 2025, despite factors like rising protectionism, policy uncertainty, and high inflation.
While labor income, transfers, low unemployment, and accumulated savings played a role, they cannot fully explain this dynamic.
The period from early 2023 to late 2025 saw the S&P 500 index soar by approximately 80%, significantly boosting household net wealth, particularly for those with substantial stock investments.
This increased financial wealth stimulated consumption by enhancing perceived long-term resources, improving credit access through better solvency, and reducing the need for precautionary savings.
This close interaction between financial markets and the real economy is crucial for understanding recent consumption trends.
Assessing the wealth effect's growing influence
To quantify these factors, the authors estimate a consumption equation using an Error Correction Model (ECM).
This model links quarterly real consumption growth to short-term determinants including disposable income, transfers, household credit, S&P 500 valuation, and unemployment rate changes.
The study distinguishes between wealth held by the bottom 80% and the richest 20% of households.
Income is identified as a stable growth source, while household wealth is significant but more volatile.
In 2025, rising household wealth is estimated to have accounted for around half of US consumption growth, a contribution level similar to that observed just before the 2008 financial crisis.
A double-edged sword for the US
US consumption is now highly sensitive to financial market fluctuations due to growing wealth effects, creating significant vulnerability.
A sharp market reversal could quickly depress consumption, amplified by credit contraction and deteriorating confidence.
This contrasts with the euro area, where less stock exposure leads to indirect monetary policy transmission and potentially less volatile consumption.