Is US Consumer Spending Normalizing at 2% Amid Strong Employment?

Consumer spending growth slows to 2.6% in April, but Goldman Sachs sees 15% recession odds and strong labor market.

By Athena Xu

7/10, 10:47 EDT
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Key Takeaway

  • US consumer spending growth is normalizing to 2% from above 3%, indicating a return to historical trends rather than a downturn.
  • Goldman Sachs forecasts 2.5% real disposable income growth in Q4 2024, supported by strong employment and household wealth.
  • The odds of a recession remain low at about 15%, with a soft landing for both the consumer and overall economy being the most likely outcome.

Slowing Consumer Spending

Recent data indicates a deceleration in U.S. consumer spending, but this trend is more indicative of a return to normalcy rather than a precursor to an economic downturn. Real personal consumption expenditure rose by 2.6% in April year-over-year, down from over 3% last year. Nominal retail sales in May increased by a mere 0.1%, with spending in prior months revised downward. Despite these softer figures, Joseph Briggs, co-leader of the Global Economics team at Goldman Sachs Research, maintains that the U.S. consumer remains robust. This resilience is attributed to high employment levels, substantial household wealth, and low debt levels. Goldman Sachs forecasts a 2.5% real disposable income growth for U.S. consumers in Q4 2024, year-over-year.

Briggs asserts, "A soft landing both for the consumer and the overall economy is clearly the most likely outcome." The firm estimates the odds of a recession at about 15%, aligning with historical averages. The slowdown in spending growth, from above 3% in the latter half of last year to around 2% today, is seen as a normalization rather than a weakening. This 2% pace aligns with historical trends and is considered sustainable given the current economic cycle.

Labor Market Dynamics

The labor market remains a significant driver of consumer spending. Although it has rebalanced from an extremely tight state, it is still relatively tight by historical standards. Goldman Sachs forecasts approximately 175,000 job gains per month for the rest of 2024, with wage growth expected to slow to 3.5% by year-end. This continued job growth and strong real wage growth are anticipated to support household cash flows.

However, the labor market also poses the biggest downside risk. According to Goldman Sachs' research, a 1% rise in the unemployment rate could lower overall spending growth by about 0.6 percentage points. This impact is more pronounced among lower-income households, which could see a 1.2 percentage point pullback in spending, compared to a 0.4 percentage point pullback for higher-income households.

Household Balance Sheets

Household balance sheets are in good shape, bolstered by a 50% increase in home prices and a 70% increase in equity prices since 2019. Goldman Sachs' wealth effects model estimates a 0.3 percentage point boost to spending over the next year, compared to a 0.1 percentage point drag over the past year. This incremental strength is expected to drive spending in 2024.

Despite some corporate pessimism about consumer spending, particularly from companies with lower-income consumer bases or those exposed to housing-related spending, the macro data suggests a healthier consumer outlook. Disinflation in goods prices and a shift towards services spending, which is more prevalent among small businesses, also contribute to this divergence.

Street Views

  • Joseph Briggs, Goldman Sachs Research (Cautiously Optimistic on the US economy):

    "A soft landing both for the consumer and the overall economy is clearly the most likely outcome."

  • Joseph Briggs, Goldman Sachs Research (Neutral on US consumer spending):

    "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."

  • Joseph Briggs, Goldman Sachs Research (Bullish on labor market impact on consumer spending):

    "I expect the labor market to be a big driver of income growth and therefore spending for the rest of 2024... continued job growth and strong real wage growth should support real household cash flows."