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A devastating "poverty effect" is sweeping the United States, and could wipe as much as US$300 billion ($549 billion) off consumer spending in the next two years, according to billionaire "vulture fund" boss Wilbur Ross.
For the past five years, the rising value of assets such as homes and shares has created what economists call a "wealth effect", keeping America's consumers confident and boosting spending in the shops.
Ross, who founded WL Ross, a "vulture fund" that specialises in buying distressed assets at low prices, warns this exuberance has now been supplanted by a pernicious "poverty effect".
"Consumer spending is 70 per cent of our economy and the combined losses by individuals from home price deterioration and the stock market are close to US$6 trillion," he said.
"Just as rising markets had created a 'wealth effect', declines have a 'poverty effect', making people reluctant to spend. This may affect the economy negatively by US$250 billion to US$300 billion over a one- to two-year period."
That would be more than 2 per cent of America's US$13 trillion GDP.
The latest data seems to support Ross' prediction; chain store sales took a massive 1.6 per cent dive last week, compared with a week earlier.
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