Is US consumer spending losing momentum?

US consumer spending is showing signs of slowing. But that’s more of a return to normal than an indication that a downturn is looming, according to Goldman Sachs Research.

Some recent consumption data has appeared soft. Real personal consumption expenditure rose 2.6% in April from the same month a year ago, compared with a pace above 3% last year. Nominal retail sales increased by just 0.1% in May, while spending in prior months was revised down.

Even so, Joseph Briggs, who jointly leads the Global Economics team in Goldman Sachs Research, says the US consumer remains healthy. In part, that’s because of relatively high levels of employment and household wealth, and low levels of debt. The team forecasts 2.5% real (inflation-adjusted) disposable income growth for the US consumer in the fourth quarter of 2024, year over year.

The healthy outlook for the consumer is one of the reasons Goldman Sachs Research thinks the odds of a recession are still quite low — at about 15%, which is roughly the historical average. “A soft landing both for the consumer and the overall economy is clearly the most likely outcome,” Briggs says.

We talked to Briggs about the state of the US consumer, why corporate America has been downbeat on consumption expenditures, and the outlook for the overall economy.

How does slower consumer spending growth fit into your overall outlook?

Spending growth has slowed from above 3% in the second half of last year to a trend rate of probably around 2% today. This is basically what we’re forecasting for 2024 overall. But I would consider this slowdown in the pace of spending growth as more of a normalization and not really a weakening.

A 2% pace of real spending growth overall is basically in line with historical trends. It’s by no means a bad thing for the economy. This is roughly what we’d expect, given where we are in the current cycle — a normalization from an unsustainable pace in the second half of last year.

Is the labor market still a positive for the consumer?

We’ve rebalanced from an extremely tight labor market to a labor market that’s still fairly tight by historical standards. By most tightness measures, we’re at, or maybe a touch below, where we were in 2019. But to keep perspective, 2019 was considered the hottest labor market in postwar US history.

I expect the labor market to be a big driver of income growth and therefore spending for the rest of 2024. So it will be pretty good for the consumer. Our forecasts are still for about 175,000 job gains per month for the rest of this year. We’re expecting that wage growth is going to slow to only 3.5% by year-end. What this means is continued job growth and strong real wage growth should support real household cash flows. 

To be sure, the labor market is also our biggest downside risk. Any incremental deterioration would probably lead to a weaker consumer outcome. To put some numbers around that, our research tells us that each percentage point rise in the unemployment rate lowers overall spending growth by about 0.6 percentage points. This is driven by a 1.2 percentage point pullback for bottom income households but only a 0.4 percentage point pullback for top income households.

Are household balance sheets in good shape?

They are. Going back to 2019, prior to the pandemic, we’ve seen a 50% increase in home prices and a 70% increase in equity prices. It’s hard to have a bad balance sheet outcome following these types of asset price gains.

If you take our standard wealth effects model that tries to translate asset price changes into spending growth, we estimate a 0.3 percentage point boost to spending over the next year, versus about a 0.1 percentage point drag on spending over the last year. So we view this as an incremental source of strength and a driver of spending in 2024.

What do you make of comments from companies about a consumer slowdown?

There’s been quite a divergence between the way companies have viewed the consumer and what the macro data have shown for maybe the last year and a half. This divergence certainly accelerated in the first quarter, when a lot of companies called out that weakness. It’s a bit of a puzzle, and there are probably a number of reasons that contribute to this divergence.

First, publicly traded consumer companies tend to have more of a skew to the lower-end consumer relative to overall spending. Even though we’re not seeing lower-income households as worse off, we’re certainly not seeing them as a source of strength to drive above-trend spending growth. Second, consumer-facing companies with exposure to the housing-related spending have probably experienced headwinds recently, given that the housing market has slowed significantly due to higher rates.

A third point is that disinflation, particularly for goods prices, makes year-over-year nominal comparisons are a little bit more challenging. I think that has probably lowered revenue growth reported by some public companies.

The last reason for the divergence is that services spending has outperformed goods spending over the last year, and consumer service companies skew more toward small businesses than the large public companies that are featured heavily in earnings calls and reports.

What might change your views on the consumer or upset your forecasts?

I don’t really see a lot of upside risk to our base case from here. There’s no clear catalyst that would prompt an acceleration in spending growth back to 3% or 4%. Saving rates are already low. There’s no fiscal expansion coming in the next couple of quarters that would provide a boost to spending. I don’t think the labor market is going to accelerate again from here and cause job growth and wage growth to rise above their recent trends. 

At the same time, though, I think the case is pretty strong for the consumer to continue at a roughly on-trend pace of spending growth, say 2% to 2.5%. That’s the most likely outcome, provided the labor market remains healthy with unemployment around 4% or below and wages running well above inflation.

This sounds like good news overall for the economy.

It absolutely does. If the consumer is growing their spending at a roughly on-trend pace, that should be what we expect for the overall economy, barring swings in some of the more volatile components of GDP. With this type of tailwind to overall growth, it’s hard for GDP to underperform significantly. It’s one of the reasons why we think the odds of a recession are still quite low. A soft landing both for the consumer and the overall economy is clearly the most likely outcome.

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.