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The biggest driver of the surprisingly resilient U.S. economy has been Americans’ ability and willingness to shake off the bad mood and “buy anything that isn’t nailed down,” as Chris Rupkey puts it.

Consumer spending does not appear to be slowing down much either. Although quarter-on-quarter growth slowed from an impressive 4.2 percent in the first three months of 2023 to 1.7 percent in the second quarter, it is currently at 3.2 percent in the current quarter.

This is the main factor confusing hardlanders, as Ed Yardeni wrote this week:

Forecasters who have long expected a hard landing for the economy made a big mistake by betting against American consumers. But the hardlanders don’t accept that consumer spending isn’t declining; Instead, they are doubling down on the pressure by predicting that it will happen soon because consumers are now running out of pandemic-related excess savings and have too much consumer debt. Additionally, student loan payments are about to resume.

It’s easy to see what triggers the overspending. Yes, sure, inflation is still high, but real incomes are growing at about 4 percent per year, according to Goldman Sachs (zoomable version):

Above-average spending performance in 2023 reflects robust real income growth, particularly early in the year © Goldman Sachs

And after being briefly interrupted by the pandemic lockdowns, the close connection between real income growth and spending has reasserted itself (zoomable version):

Real income growth has historically driven real spending growth, and the spending-to-income ratio is normalizing after collapsing during the pandemic © Goldman Sachs

You can read the full statement from Goldman Sachs here.

But what about the future? Last year saw numerous monetary policy tightenings that will only hit the economy with proverbial long and variable delays. Mortgage rates have risen over 7 percent and the job market is starting to cool.

Even the optimists are becoming a little more cautious. Joseph Politano of Apricitas Economics, for example, believes that the post-pandemic boom is now coming to an end:

The US labor market has cooled significantly over the past two years. This ended a recent period of exceptional strength and returned to a situation roughly similar to pre-COVID-19. Talk of a labor shortage continues to decline, with the share of small businesses struggling to fill positions falling to its lowest level since the start of 2021 and remaining at levels seen at the end of 2019. Gross hiring fell below 6 million in July as slowing demand reduces companies’ incentives to hire new workers and makes it harder for workers to move to better jobs. Over the past three months, net growth in nonfarm payrolls has fallen to just over 100,000 per month — enough to keep pace with population growth, but not much else.

Wage growth is also slowing – hard data from the Employment Cost Index (ECI) shows that private sector wage growth stood at 4.6% through the end of June, while the higher-frequency measure of average hourly wage fell below 4.3% in August. Meanwhile, leading indicators such as growth in wages published on Indeed have fallen even further from their 2022 peaks.

But so far we are actually only talking about a slowdown, not a turnaround.

Making predictions is difficult, especially about the future etc. But Goldman’s Joseph Briggs argues that “several of the drivers of income growth in 2023 are likely to repeat themselves in 2024”:

The labor market is cooling significantly, job vacancies are falling and job growth is approaching sustainable levels according to the latest data, but remains tight. We expect job growth to remain comfortably positive, averaging over 100,000 per month through the end of 2024, keeping the unemployment rate stable at 3.5%.

Additionally, we expect nominal wage growth to remain fairly high – we forecast wage growth of 3.75% on a Q4/Q4 basis in 2024 – which coupled with falling inflation – we forecast headline PCE inflation of 2 .4% on a Q4/Q4 basis – should be maintained By the end of next year, real wage growth should be well over 1%. The combination of continued employment growth and positive real wage growth should therefore ensure a strong increase in real income in 2024.

Here are Briggs’ diagrams:

The Goldman economist notes that there are two other (perhaps little-discussed) factors that will affect American consumption in the coming year: Medicaid enrollment (bad) and higher interest rates (actually good):

Additionally, the U.S. household sector has a significant amount of interest-bearing assets, meaning interest income is likely to increase as interest rates rise. Although there has been a significant increase year-to-date, interest income has not yet increased as much as we would normally expect given the rate hike, suggesting that we have not yet seen the full impact of the Fed rate increases in private cash flow Households. This is partly because deposit rates have not yet risen as much as they are ultimately likely to rise based on past cycles of interest rate hikes. Assuming interest rates remain high, household interest income is expected to rise as yields on interest-bearing assets rise to reflect past interest rate increases.

On the negative side, Medicaid’s continuous enrollment policy – which ensured that every person who was eligible for Medicaid did not lose their health insurance coverage while the country was in a public health emergency – expired in April, and we have not yet experienced the decline in transfer revenue that we expect as states reduce enrollment. Timing is hard to rely on since cuts to Medicaid revenues are determined at the state level, but Medicaid spending is likely to trend downward over the next year and a half, creating significant headwinds for transfer revenues. However, these revenue headwinds are likely to have little impact on spending, as leading academic studies show that Medicaid expansion has a greater impact on who pays for health care than on actual spending.

All told, Goldman forecasts real incomes will grow another 3 percent in 2024, down from about 4 percent in 2023 but well above the pre-pandemic 20-year average of 2.5 percent (zoomable version):

But since this is America, this is what we’re talking about. . .

. . . We forecast real income growth of almost 4% for households in the top income quintile, versus 1½% in the bottom quintile.

If you want more, you can find the full GS note here.

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