Will the wealth effect from financial asset and home price appreciate finally assert itself this coming year? Bank of America Merrill Lynch economists give us four reasons why that might be happening:
We see four reasons to expect healthier consumer spending.
First, the worst of the tax shock is over. Both payroll and upper-income tax rates rose at the start of
this year, and we think the negative impact on spending growth should be fading.
Second, consumers have made considerable progress in cleaning up their
balance sheets, reducing debt burdens and accumulating wealth. Households
have gained $16.1 trillion in financial wealth and $3.0 trillion in housing wealth
since their respective troughs (Chart 2).
Third, firing has continued to decline as seen by the drop in jobless claims, although some of this may reflect people
exhausting their benefits. This supports current income but also helps
expectations about future income growth.
Finally, as the labor market tightens, wage growth will improve, although that is more likely in 2015 than in 2014. The
consumer still faces challenges, but we think the tides have turned.