Dow Jones Industrials Touch 10,000….What Does It Mean?

Feeling any richer today?

The Dow Jones industrial average touched the 10,000-point milestone yesterday, giving consumers another reason to feel warm and fuzzy about the econo-my. But it’s not likely to cause them to suddenly go on a spending spree, economists say.

“It’s mostly a symbolic thing,” Ohio University economist Richard Vedder said of the short-lived 10,000 milestone. The Dow finished down for the day, closing at 9,930.47.

“If anything, there may be a modest, short-rim effect of reminding people of their wealth. But for a majority of American families, this particular rise in the stock market is not all that important,” Vedder said.

Ken Goldstein, an economist with the Conference Board In New York, added: “They may be celebrating in Newport, R.I., but most consumers will look at this and pay more attention to who wins the March madness [basketball] pools.”

That’s because for people with money in the market, the more important thing to know about stocks is their continued and sustained climb since the early 1990s. Some economists believe this has created a “wealth effect” – people spend more when they feel richer.

Consumer spending, which fuels two-thirds of the nation’s economic activity, is at record levels.

Vedder and some others believe that people look at the run-up in their stock portfolios and feel confident spending more money.

Further evidence is plummeting savings rates, which recently dipped into negative numbers for the first time since the Great De-pression. “People think, ‘We don’t have to save. We have plenty of money,’ ” Vedder said.

One problem with the wealth effect, however, is that it works exactly the opposite way when people feel they’re losing money. Few economists believe stocks can sustain their momentum, and when people begin seeing their retirement money shrinking, it’s not going to be pretty.

“The problem is that wealth can go down as well as go up,” Vedder said. “It could be that people will get burned.”

So far, zzzzzzz said, most consumers aren’t spending beyond what might be expected, given their increased assets. It’s not just the market, however, that propels spending.

“People spend because their incomes have gone up, their job situation is quite secure, and they believe there is a good future out there,” said Cynthia Latta, an economist with Standard & Poor’s/DRI in Lexington, Mass.

And not all economists believe the stock market’s wealth effect has much significance. To begin with, they point out that for most Americans, their biggest asset is a home, not a stock portfolio.

The Federal Reserve reported that the value of U.S. households’ stock portfolios now represents 25 percent of total household assets, up from 10.4 percent just 10 years ago.

But that means 75 percent of their assets are somewhere else, the Conference Board’s Goldstein noted.

Since most people have their assets in something other than stocks, the big run-up, and especially a 10,000 milestone, doesn’t mean much except on Wall Street, which has a vested interest in It.

“This is all a game,” Goldstein said.

He doubts that even consumers with stocks are spending more because of a healthy market. “I don’t know of anybody who cashed in a share of IBM to go buy a washing machine,” he said.

Along with their assets, consumers also have a lot of debts, Goldstein pointed out. A big drop in the market could make consumers slow down both their spending and their borrowing. But that drop woud have to be both dramatic and sustained to really change the way most consumers feel about the economy, he said.

Although not all economists take such a negative view of the wealth effect, most agree that it will take more than a new record to change consumer behavior.

“If the market drops back down to 7,000, you’re not going to get a whole lot of people throwing themselves out the window,” Goldstein said. “At the same time, hitting 10,000 isn’t going to send them runing for their champagne glasses.”