The decline in stock markets over the past year has prompted speculation that shrinkage in household wealth will precipitate a global recession. Yet there is little evidence that gloom on Wall Street has spread to ordinary people.

Consumer spending and borrowing are holding up relatively well. From an all-time peak of $43,200 billion at the end of March last year, the net worth of US households declined by 4.1 per cent by end-December - the worst setback since the mid-1970s. Yet household debt expanded by 8.75 per cent over the year without giving rise to concerns about credit quality.

In Britain which is more vulnerable to negative wealth effects than continental Europe, household spending has also held up. House prices are more important for the UK personal sector than equity prices. And they remain robust.

In Ireland, tax cuts introduced in the Budget have helped to temper the potential impact of a slowing economy while there has been a marked slowdown in house price growth.

In mainland Europe, where recent tax cuts are having a benign impact, the story is anything but gloomy. Economists at Goldman Sachs calculate that consumers will react to falling stock markets as they did in 1998 - that is, not at all.

So the much feared wealth effect is elusive. Is it a mirage?

Few doubt that a positive wealth effect contributed significantly to global economic growth when markets went up in the 1990s. This was sparked by the US, where personal exposure to equity both directly and through collective vehicles such as mutual funds reached unprecedented levels.

Yet the shrinkage of ordinary people's wealth in this decade has been far from devastating. Investment advisers Bianco Research estimates that US investors poured $1,454 billion into domestic equity mutual funds between October 1990 and March 2001, on which the market value last month was $1,847 billion. Unrealised profits on that investment have simply shrunk from $753 billion at the peak to $393 billion.

So far a decline of about a fifth in the S&P 500 index since the start of the decade has been partly offset by other factors. There has been a positive wealth effect in bonds, as well as residential property.

This confirms a lesson of history, which is that a positive wealth effect does not breed an equal and opposite reaction when asset prices fall. After the 1987 crash US consumer spending rose in 1988, while business investment was unaffected. That may imply that for private individuals, solvency is less important than liquidity; that is, the decline in balance sheet worth may matter less than a decline in income or employment prospects, especially when the fall is from record levels.

US employment has started to weaken. Yet the economic slowdown is being driven not by the personal sector but by business. And that may partly reflect a different kind of wealth effect.

On the way up, soaring prices on Nasdaq provided a cheap funding opportunity that underpinned a business investment splurge heavily biased towards technology. Now investment has collapsed and inventory is accumulating. In boardrooms in the US and to a lesser extent in the UK, astonishing amounts of wealth have been destroyed because of the disappearance of value in stock options schemes.

Since last October, the Nasdaq index has fallen by more than 40 per cent, which matters because a disproportionate amount of option wealth is held in technology companies. It seems plausible that the extraordinary speed with which US companies have recently cut investment, inventory and people may reflect a fierce attempt to recoup lost billions in stock option schemes.

In the last quarter of 2000, US non-financial corporations also spent $87.7 billion buying their own shares. That looks like a desperate shot at propping up corporate earnings and stock option values.

Whether it makes sense, especially for outside shareholders, to shrink the equity in this way is another matter. Just as the ill-fated Long-Term Capital Management hedge fund responded to declining arbitrage returns by borrowing more, the US corporate sector is responding to falling profits and stock prices by raising its debt-equity ratio and weakening its balance sheet. It is a ploy that cannot be used indefinitely. And this heavy buying did not prevent the markets from sliding late last year - a point worth remembering now that investors are once more buying on dips.