One of the economic mysteries of the past two years has been the apparent weakness of the wealth effect on consumption, notably in America. Share prices have tumbled during that period, making the average American considerably poorer. Yet consumer spending, which many economists had thought to be strongly correlated with changes in wealth, continued to grow at a decent lick. This is one of the main reasons why the American economy had managed, at least until recently, to avoid slipping into recession.
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