US Economics Analyst
The US Consumer: Still Strong in 2024 (Briggs)
GDP growth has outperformed in 2023 on the back of strong consumer spending, itself driven by an acceleration in real income growth to around 4% (Q4/Q4 basis; GS forecast). Whether spending continues to grow at a robust pace depends heavily on the income outlook, so in this US Economics Analyst we update our income forecasts and argue that the US consumer will likely outperform again in 2024.
Several of the drivers of income growth in 2023 are likely to repeat in 2024. Continued job gains and positive real wage growth should continue to boost real income, and household interest income should increase as yields on interest bearing assets rise to reflect past rate increases. And while transfer income faces a headwind from declining Medicaid coverage following the end of pandemic-related eligibility expansion, the spending impact from coverage loss will likely be modest.
After incorporating these drivers into our forecast, we expect real income will grow by 3% in 2024 on a Q4/Q4 basis. While this pace of income growth would normally imply 2-3% real spending growth, the spending response will likely be smaller than normal because some drivers—namely rising interest income—will mostly benefit higher-income households that have a lower propensity to spend. Indeed, we forecast almost 4% real income growth for households in the top income quintile, vs. 1½% in the bottom quintile.
We see several other reasons why spending growth will underperform income growth in 2024. Rising interest expenses not included in the disposable income calculation will likely effectively subtract ½pp from income growth through end-2024. And while household balance sheets remain strong overall, balance sheets of lower-income households have likely weakened, and we expect that the saving rate will rise from a quite low 3.5% today to over 5% by the end of next year. That said, our scenario analysis suggests that real spending will likely grow above or close to its potential pace unless the labor market deteriorates more than we anticipate.
Taken together, we expect that income growth will remain a tailwind to spending in 2024, albeit a smaller one than in 2023. Provided that job and real wage growth don’t significantly underperform our forecasts, we expect that the US consumer will outperform consensus expectations, and forecast 1.9% real spending growth in 2024 in both yoy (vs. 0.9% consensus) and Q4/Q4 (vs. +1.2%) terms.
The US Consumer: Still Strong in 2024
GDP growth has outperformed in 2023 so far on the back of strong real consumer spending, which grew by 4.2% (qoq ar) in Q1, 1.7% in Q2, and is currently tracking at 3.2% in Q3.
As we noted last September and reiterated in several reports earlier this year, real spending growth is affected by a number of different factors—our standard consumption model forecasts consumption growth based on real disposable personal income (DPI) growth, changes in financial and housing wealth, credit availability, and consumer sentiment—but is typically most sensitive to real income growth (left chart, Exhibit 1). Although the tight historical link between income and consumption broke down during the pandemic due to the economic shutdown and unusually large swings in fiscal transfers, the relationship has reasserted itself in recent quarters, with spending growth largely tracking the cadence of income growth since mid-2022 (right chart, Exhibit 1).
Exhibit 1: – Real Income Growth Has Historically Driven Real Spending Growth, and the Relationship Between Spending and Income Is Normalizing After It Broke Down During the Pandemic
Source: Goldman Sachs Global Investment Research
The strength in spending was therefore largely predictable, since income growth was very likely to grow at a robust pace in 2023 barring major job losses (Exhibit 2). In particular, cost-of-living adjustments and a normalization of the effective tax rate—which surged in 2022 due to outsized tax payments on capital gains that had occurred in 2021—provided a large boost to income growth in Q1, while still plentiful labor demand has kept job gains and nominal wage growth very elevated. As a result, real income looks set to grow by around 4% in 2023 (Q4/Q4 basis; GS forecast), a pace that is well above its historical average but consistent with the above-potential real spending growth observed thus far in 2023.
Exhibit 2: The Spending Outperformance in 2023 Reflects Robust Real Income Growth, Particularly at the Start of the Year
Source: Goldman Sachs Global Investment Research
Whether spending—and by extension, overall GDP—continues to grow at a robust pace depends heavily on the income outlook. Therefore, in this US Economics Analyst we update our income forecasts and argue that the US consumer and broader growth will likely outperform expectations again in 2024, consistent with the expectations of our consumer equity analysts.
Income Drivers in 2024 Will Look Somewhat Similar to 2023
Several of the drivers of income growth in 2023 are likely to repeat in 2024.
The labor market is clearly cooling, with job openings falling and job growth slowing closer to sustainable levels based on the most recent data, but remains tight. We expect that job growth will continue to run comfortably in positive territory and average over 100k/month through the end of 2024 (left chart, Exhibit 3), leaving the unemployment rate stable at 3.5%.
In addition, we expect nominal wage growth will remain fairly elevated—we forecast 3.75% wage growth in 2024 on a Q4/Q4 basis—which combined with falling inflation—we forecast 2.4% headline PCE inflation on a Q4/Q4 basis—should keep real wage growth well above 1% through the end of next year (right chart, Exhibit 3). The combination of continued job gains and positive real wage growth should therefore provide a healthy boost to real income in 2024.
Exhibit 3: Continued Job Gains and Positive Real Wage Growth Should Support Income Gains
Source: Goldman Sachs Global Investment Research
In addition, the US household sector holds a substantial amount of interest-bearing assets, meaning that interest income should rise as interest rates increase. While there has been a notable increase since the start of the year, interest income has not yet risen by as much as we’d typically expect based on the increase in interest rates (left chart, Exhibit 4), suggesting we have yet to see the full effect of the Fed’s rate hikes on household cash flows. This partially reflects that deposit rates have not yet risen by as much as they probably ultimately will based on past hiking cycles (right chart, Exhibit 4). Assuming that interest rates remain elevated, household interest income should increase as yields on interest-bearing assets rise to reflect past rate increases.
Exhibit 4: Interest Income Should Rise Due to Past Interest Rate Increases
Source: Goldman Sachs Global Investment Research
On the negative side, Medicaid’s continuous enrollment provision—which ensured any individual eligible for Medicaid would not lose health insurance coverage as long as the country remained in a public health emergency—came to an end in April, and we have yet to see the pullback in transfer income that we expect as states trim enrollment. It is hard to have much confidence around timing since the trimming of Medicaid rolls will be determined at the state level, but Medicaid spending should trend downwards over the next year and a half, thereby creating a notable headwind to transfer income (Exhibit 5). This income headwind probably has modest read-through to spending, however, since leading academic studies find that Medicaid expansion impacts who pays for healthcare more than it affects actual spending.[1]
Exhibit 5: Transfer Income Faces a Headwind from Medicaid as Pandemic Eligibility Expansion Ends, but the Spending Impact Should Be Modest
Source: Goldman Sachs Global Investment Research
Forecasting 3% Real Income Growth
After incorporating these drivers into our forecast, we expect real income will grow by 3% in 2024 on a Q4/Q4 basis. In terms of components, expected labor income gains account for over half this increase, we expect interest income increases will raise real income growth by over 1pp, and the pullback in Medicaid coverage is set to subtract almost ½pp (left chart, Exhibit 6). This pace of real income growth is below the 4% pace in 2023, but comfortably above the roughly 2½% real growth pace observed in the 20 years prior to the pandemic. In terms of the timing of these real income gains, we forecast a flatter profile than in 2023, as start-of-year adjustments from COLAs and changes in the effective tax rate will likely be less of a driver of income growth in 2024.
Exhibit 6: We Forecast 3% Real Income Growth in 2024
Source: Goldman Sachs Global Investment Research
A 3% pace of real income growth would normally imply 2-3% real spending growth based on the historical relationship between income and spending. However, we suspect the spending response will be somewhat smaller. While the marginal propensity to consume (MPC) from labor income gains is probably fairly high, the MPC from the rise in interest income is probably fairly low, since rising interest income will disproportionately benefit higher-income households that have a lower propensity to spend.
We forecast very firm real income growth of almost 4% for households in the top income quintile (Exhibit 7). We forecast a respectable 1½% real income growth pace for the bottom-income quintile as well, with the slower growth pace partially reflecting the Medicaid headwind. Relative to prior years, we expect that income growth in 2024 will be slightly stronger for lower-income households and slightly weaker for higher-income households than it was in 2023, and much stronger for all households than in 2022.
Exhibit 7: We Expect 2024 Income Growth Will Be Slightly Stronger than in 2023 for Lower-Income Households and Slightly Weaker for Higher-Income Households
Source: Goldman Sachs Global Investment Research
Risks to Income and Spending
We see several other reasons why spending growth could underperform income growth in 2024 by more than it has historically.
First, although the US household sector holds a net long fixed income asset position and rising interest rates should be a positive for cashflow on net, interest expenses are not factored into the BEA’s calculation of disposable personal income (nonmortgage interest payments are considered personal outlays and therefore considered in the calculation of personal savings, but one could consider mortgage and nonmortgage interest payments as drags on consumer purchasing power). However, interest expenses should also rise with interest rates, thereby creating an incremental headwind to spending in addition to the moderate drag we anticipate from the restart of student loan payments in 2023Q4. As shown in the left chart of Exhibit 8, we estimate that rising interest expenses could effectively subtract roughly ½pp from income growth through end-2024, with this headwind disproportionately affecting lower-income households.
Indeed, there are a few preliminary signs that rising interest expenses are creating some stress on household finances. Delinquency rates on subprime auto loans—which are primarily held by lower-income borrowers—have overshot their pre-pandemic levels, although delinquency rates on prime auto loans and credit cards—which are held more broadly and therefore more indicative of financial pressures on the broader US consumer—remain below their pre-pandemic levels.
Exhibit 8: We See Some Downside Risk to Spending from Rising Interest Expenses
Source: Goldman Sachs Global Investment Research
Second, while household balance sheets remain strong overall, balance sheets of lower-income households have probably weakened over the last year, and we remain skeptical that lower-income households still have a significant financial cushion to support spending growth. Recent evidence from the JP Morgan Chase Institute supports this view, as median cash balances for the lower-income quartile (i.e., households with income under $33k per year) have fallen back to below 115% of their pre-pandemic levels—and likely near or below pre-pandemic levels after adjusting for inflation—from a peak of over 190% in 2021. This drawdown is one reason why we downplay the role of excess savings in the spending outlook, and why we expect that the saving rate will rise from 3.5% today to over 5% by the end of next year.
Third, a key tenet of our relatively positive income growth forecast in 2023 is that the labor market remains tight, leading to continued job and real wage gains. If we are wrong on this forecast and the labor market deteriorates more than we expect, then real income and real spending would likely grow more slowly than we expect.
To quantify this risk, in Exhibit 9 we consider how income and spending growth might evolve under different labor market scenarios. This scenario analysis accounts for the direct hit to income growth from fewer job gains as well as the slower wage growth that we’d expect in a weaker labor market, although it does not fully capture the broader second round effects that could emerge in the event of a more significant labor market deterioration. The key takeaway is that real spending growth will likely run close to or above its potential pace provided that the unemployment rate remains below 4%, and likely remain positive unless the labor market deteriorates much more than we currently anticipate.
Exhibit 9: Income and Spending Growth Are Likely to Remain Fairly Firm Unless the Labor Market Deteriorates More than We Expect
Source: Goldman Sachs Global Investment Research
The 2024 Spending and Growth Outlooks
Taken together, our analysis implies that real income growth will remain a tailwind to real spending growth in 2024—albeit a smaller one than in 2023—provided that job and real wage growth don’t significantly underperform our baseline forecasts.
We therefore expect that the US consumer will outperform consensus expectations, and forecast 1.9% real spending growth in 2024 in both yoy (vs. 0.9% Bloomberg consensus) and Q4/Q4 (vs. 1.2%) terms (Exhibit 10). Our forecast for continued outperformance of the US consumer is consistent with our consumer equity team's views, a key reason why we expect that overall GDP growth will outperform consensus expectations in 2024 (1.9% GS forecast Q4/Q4 basis vs. 1.2% Bloomberg consensus), and why we believe that consensus expectations for a US recession in the next 12 months are overstated.
Exhibit 10: We Expect Spending Will Outperform Consensus Forecasts, Grow Above Potential, and Keep Overall Growth Firm
Source: Goldman Sachs Global Investment Research
Joseph Briggs
The US Economic and Financial Outlook
Forecast Changes
Source: Goldman Sachs Global Investment Research
- 1 ^ Finkelstein, Amy, Nathaniel Hendren, and Erzo FP Luttmer. "The value of Medicaid: Interpreting results from the Oregon health insurance experiment." Journal of Political Economy 127.6 (2019): 2836-2874.
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