In the Keynesian Demand Model, personal consumption expenditures, which accounts for something like 70% of GDP, are primarily determined by one's disposable income. Since real salaries and wages have been declining for the past eight years, this is one reason why GDP's growth has been so anemic. Realizing what has been happening to salaries and wages, the Fed has increasing relied on asset inflation (stock market) to make the consumer feel wealthier (wealth effect) and, of course, feel more comfortable with one's personal financial well being. If individuals feel wealthier due to the rise in the stock market, then, the model predicts that the consumption function, buying by consumers, would shift upward causing GDP to increase. Bad news from the above chart is that the Consumer Comfort Index is diverging from the stock market, which calls into question the positive impact of the so-called wealth effect on the economy.
