Wealth Effect & Market Growth: Key Takeaways from March 2025 Market Pulse Webinar

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Both before and during each Market Pulse webinar, our audience submits their burning questions to our expert panelists. For our March Market Pulse webinar, an all-star economist panel, composed of Dr. Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates, Dr. Robert Wescott, President of Wescott Strategic Advisors, and Dr. Mark Zandi, Chief Economist at Moody's Analytics, addressed many of these audience questions in a lively panel discussion. Below are their answers on questions around the K-shaped economy, the GDP, and more.

Q: Thinking about the K-shaped economy, recent growth has been concentrated in the top end of the market. What's happening to those in that segment, and how important is sustaining that current spend for our economy?

Dr. Robert Wescott, President at Wescott Strategic Advisors: We've done analysis looking at these wealth effects. One of my professors, Robert Schiller, who won the Nobel Prize and taught me macroeconomics, also estimated the wealth effect from housing wealth. The argument is pretty simple. If your house's value increases from $500,000 to $600,000, you feel wealthier, and you may tell your spouse that it's time to finally add that deck on the back or modernize the kitchen like you've been talking about doing for years. Professor Schiller estimated about a 7% wealth effect from housing wealth. I think those factors are critical. I think they've been boosting the economy more than people realize. We estimate that, in the last twelve months, the increase of wealth has probably explained about 60% of the increase of consumer spending. Trust me, most of that is at the top end of the K curve. The people at the top are the ones who have their own homes and have the vanguard statements coming in the mail, and they are the ones who are having their spending being fueled by those increases of wealth.

Dr. Mark Zandi, Chief Economist at Moody's Analytics: According to the Survey of Consumer Finance, the top 10% of the income distribution, making around $275,000 or more, account for almost 50% of personal outlays and that top 10% is where the stock wealth is concentrated. I think it's the well-to-do that's driving the economic train and they focus on their stock portfolios like a laser beam. When they say green they feel good and wealthier, and they go out and spend. When they see red, they become cautious very quickly.

And the other thing to point out is that the vast majority of the well-to-do are old in their fifties and sixties. That's a big deal. So if your retirement nest egg diminishes, you feel that's a real problem, and you become cautious very, very quickly. You can just feel it. Go look at what the airlines are saying or the high-end hotels. You can feel it in the atmosphere.

Dr. Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates: I think there's a missing piece of the connection. But all the studies, even though they might disagree slightly over the exact numbers, are consistent with the wealth effect components and on spending. But it even transfers down to people who don't have a portfolio. If your company stock price has gone down, which compensation is often tied to, or you worry that the company is going to do layoffs, you automatically start to cut back, even though you don't have direct exposure to the stock market. So those effects are real, not only on the ones who have the wealth, but also on the ones that worry about keeping their jobs.

Q: We did describe GDP as something to measure and there has been a lot of interest in federal spending and federal spending cuts in the news recently. What is the amount of federal spending that goes into the GDP? What is the proportion of general government spending versus broken down by government level (i.e. federal, state, and local)? And, what is the right balance of potential deficit to GDP and what do we actually see?

Dr. Zandi, Moody's Analytics: I do think our fiscal situation is an issue. It's a problem, perhaps not this quarter or even this year, but the trend lines of the deficit look pretty disconcerting. The nation's deficit is about 6% of the GDP and, if you exclude the interest payments on the debt, it's about 3% of the GDP. That's the so-called primary deficit that's in a full employment economy, like we have currently. The unemployment rate is 4%, and that's full employment. The economy is as good as it's going to get. If you're running a large primary deficit in that kind of situation, that's a real problem and the debt load is 100% of the GDP. It has doubled since the financial crisis for lots of different reasons. The crisis, the COVID-19 pandemic, the tax cuts, and the spending all contributed. And if you look at the current forecast with reasonable economic assumptions under current law, it just feels like it is going to break at some point, causing interest rates to rise. Here's a good rule of thumb. For every percentage point increase in the nation's debt to GDP ratio, it will add one to 2 basis points to the 10-year Treasury yield. So if you do the arithmetic here and look at the forecast, the 10-year Treasury yield is 4 and a quarter. If you look at 10 years from now, it's, on average, going to be around 4 and a half. And at some points, it's very nonlinear. It's going to become a real problem. So we really do need to address this in my opinion.
Dr. Wescott, Wescott Strategic Advisors: I agree with almost everything that Mark said. I think that running a $2 trillion annual budget deficit when you have a 4% unemployment rate is economic malpractice. There's no justification for being so much in debt and adding to your debt at that rate when you are basically at historically low rates of unemployment. Our rate of unemployment right now is like one of the six lowest numbers in the last 75 years. So we have, essentially, all Americans working, and we're still running a $2 trillion deficit. I don't think we should be doing that. I'll also just say that I am concerned. We have large European financial asset managers as clients. We spoke to them in early January, and, at the time, they said that they only wanted to invest in America, because we have the science, technology, and AI along with low taxes and deregulation and the scientific base in our universities and research labs. We had a call with the same group last week and they are worried that we are destroying our scientific base, including our research labs and medical research, and are now wanting to put their money back into Germany and into Europe.