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The US economy has proven to be surprisingly resilient, largely due to the strong consumer spending habits of Americans. Despite forecasts of a hard landing, consumers continue to buy at a steady pace, confounding the skeptics. While there has been a slight slowdown in consumer spending growth, it is still tracking at a healthy 3.2% in the current quarter.
One of the key factors driving the spending spree is robust real income growth. Although inflation remains high, real incomes are growing at a rate of approximately 4% per year. This relationship between income and spending, which was disrupted during the pandemic, has now normalized.
Looking ahead, there are concerns about the impact of recent monetary tightening measures. Mortgage rates have climbed over 7%, and the labor market is starting to cool down. However, even the most optimistic forecasters are becoming more cautious. The post-pandemic boom appears to be coming to an end, with labor market growth slowing and wage growth decelerating.
Despite these challenges, it is important to note that we are currently experiencing a slowdown rather than a reversal. Several drivers of income growth in 2023 are expected to repeat in 2024, including job growth, wage growth, and falling inflation. While the labor market may be cooling, it is still expected to remain tight, with job growth averaging over 100,000 per month through the end of 2024. Furthermore, nominal wage growth is forecasted to remain elevated, resulting in positive real wage growth.
It is also worth considering two other factors that will influence consumer spending in the coming year: Medicaid enrollment and higher interest rates. The end of Medicaid’s continuous enrollment provision is expected to lead to a pullback in transfer income, creating a headwind for spending. On the other hand, higher interest rates will boost interest income for households.
Overall, Goldman Sachs forecasts real incomes to grow by around 3% in 2024, slightly lower than 2023’s growth rate but still above the pre-pandemic average. Notably, this growth is expected to be uneven, with households in the top income quintile experiencing almost 4% growth, compared to 1.5% for those in the bottom quintile.
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