WASHINGTON: The tumble in US stock prices has inflicted psychological pain and financial losses at least on paper for people with a meaningful stake in the market.

Their anxiety conjures another fear, too: That consumers and businesses might slash their spending in response.

Consumers are the engine of US economic growth, so any sharp pullback in their spending would hurt. Could the result be a weaker economy and lost jobs? So far at least, there’s little sign that the correction in the Dow Jones industrial average it dropped 10pc from its peak late last month will squeeze the economy. After rallying by the time the market closed on Friday, the Dow is still about 50 per cent above where it was after its last correction in February 2016. Most economists see the current drop as an inevitable result of stocks’ rapid ascent since then. And few think most investors are about to curb their spending.

Market declines that do end up derailing an economy are typically triggered by financial imbalances unsustainable debt, for example, which ignited the Great Recession in 2007.

“The economy looks quite resilient to this type of relatively modest shock,” said Gregory Daco, chief US economist at Oxford Economics.

Referring to the stock market’s swoon, Daco said: “We might be seeing a more normal evolution of things. Ups and downs are not atypical.”

Confidence among consumers and businesses jumped after President Donald Trump’s election and reached a 17-year high in November. Stock prices rose, and so did consumer spending.

What economists call the “wealth effect” is the phenomenon that occurs when growing home values and stock prices make people feel richer and more secure. Households tend to spend down some of that wealth, thereby boosting the economy.

Conversely, when household wealth shrinks significantly, the reverse tends to occur: People, feeling less confident about their finances, usually spend less.

Since the recession, consumer spending has grown about one penny for each dollar of additional stock market and housing wealth down from 3.5 cents before the downturn said Michael Feroli, an economist at JPMorgan Chase. As a result, spending might not fall as much this time.

Even if the wealth effect is less pronounced, it still has an impact. The sharp rise in share values in the past year before the past week’s correction added about $8 trillion in household wealth. Even if just one penny of every dollar of that gain were spent, it would translate into $80 billion, or about one-quarter of the overall increase in consumer spending in 2017, Feroli said.

A falling stock market can also make it more expensive for companies to borrow and raise money, because investors become less willing to buy the companies’ stock offerings. Companies are then forced to borrow more instead at higher loan rates.

Most economists, though, say stock prices would have to fall much further for these depressive effects to kick in.

In fact, Feroli said he expects the economy to accelerate somewhat this year in part because of big spending increases that are included in a budget bill Congress approved early Friday morning. The economy will likely now expand 2.6pc in 2018, Feroli estimates, up from a previous forecast of 2.2pc.

“In order for it to start affecting our forecast, it has to persist for a while,” said Joel Prakken, chief US economist for Macroeconomic Advisers by IHS Markit.

“It’s just not clear to me yet where this is going to settle.” Mark Zandi, chief economist at Moody’s Analytics, suggested that the current gyrations are a “garden variety correction” for now.

“These things can take on a life of their own,” Zandi said. “10pc down is no big deal. 20pc that’s a big deal.”

Published in Dawn, February 11th, 2018