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The biggest driver of the surprisingly resilient US economy has been the ability and willingness of Americans to shrug off the bad vibes and buy “everything that isn’t nailed down”, as Chris Rupkey puts it.
Consumer spending doesn’t seem to be slackening much either. Quarter-on-quarter growth did slow from a blockbuster 4.2 per cent in the first three months of 2023 to 1.7 per cent in the second quarter, but it’s currently tracking at 3.2 per cent in the current one.
This is the main factor that has confounded the hard-landers, as Ed Yardeni wrote this week:
Forecasters who’ve long been expecting a hard landing of the economy made a big mistake in betting against American consumers. But the hard-landers are not accepting that consumer spending isn’t going to retrench; instead, they’re doubling down by predicting that it will happen soon, because consumers are running out of pandemic-related excess savings now and have too much consumer debt. In addition, payments on student loans are about to resume.
It’s easy to see what’s juicing the spending splurge. Yes, sure, inflation is still high, but real incomes are growing at about 4 per cent a year, according to Goldman Sachs (zoomable version):
And after being briefly short-circuited by pandemic lockdowns, the intimate relationship between real income growth and spending has reasserted itself (zoomable version):
You can read the full Goldman Sachs note here.
But what about the future? There’s been a lot of monetary tightening over the past year that will only hit the economy with the proverbial long and variable lags. Mortgage rates have climbed over 7 per cent, and the labour market is beginning to cool down.
Even the optimists are therefore becoming a bit more guarded. For example, Joseph Politano of Apricitas Economics reckons that the post-pandemic boom is now ending:
The US labor market has cooled significantly over the last two years—ending a recent period of exceptional strength and returning to a situation roughly similar to pre-COVID. Talks of labor shortages continue to wane, with the share of small businesses having trouble filling positions falling to the lowest level since early 2021 and hovering at rates equivalent to late 2019. Gross hiring dipped below 6M in July as slowing demand reduces firms’ incentives to hire new workers and makes it harder for those employed to switch to better jobs. Over the last three months, net growth in nonfarm payrolls has fallen to just above 100,000 per month—sufficient to match population growth but not much else.
Wage growth is likewise decelerating—robust data from the Employment Cost Index (ECI) shows private-sector wage growth at 4.6% through the end of June while the higher-frequency measure of average hourly earnings has dipped below 4.3% as of August. Meanwhile, leading indicators like growth in posted wages on Indeed have fallen even more relative to their 2022 highs.
But so far we’re only really talking about a slowdown, not a reversal.
Making predictions is hard, especially about the future etc etc. But Goldman’s Joseph Briggs argues that “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, 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. The combination of continued job gains and positive real wage growth should therefore provide a healthy boost to real income in 2024.
Here are Briggs’ charts:
The Goldman economist notes that there are two other (possibly under-discussed) factors that will influence American consumption in the coming year: Medicaid enrolment (bad) and higher interest rates (good, actually):
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, 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. Assuming that interest rates remain elevated, household interest income should increase as yields on interest-bearing assets rise to reflect past rate increases.
On the negative side, Medicaid’s continuous enrolment 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 enrolment. 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. 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.
All in all, Goldman forecasts that real incomes will grow by another 3 per cent in 2024, below 2023’s ca 4 per cent but comfortably above the 20-year pre-pandemic average of 2.5 per cent (zoomable version):
But since this is America we’re talking about . . .
. . . we forecast almost 4% real income growth for households in the top income quintile, vs. 1½% in the bottom quintile.
