US Consumer Faces ‘Harder Path Ahead’

“With COVID fears likely to persist through the winter virus season, it might take a while for spending to recover in still-depressed categories such as very high-contact and office-adjacent services,” Goldman wrote, in a new note striking a somewhat cautious tone on the US consumer, who faces “a harder path ahead.”

You can hardly blame anyone who’s skeptical on the notion that consumption will remain sufficiently robust in the months ahead to anchor optimistic assumptions about the trajectory of the US recovery. I’ve admittedly grown weary of attempts to write off the Delta variant as somehow inconsequential. It’s anything but.

If the death toll wasn’t enough to convince you, then the 42,000 jobs lost in food services in August (figure below) and the fact that leisure and hospitality added no new positions last month offered compelling evidence for the contention that the virus is still serving to delay a return to normal on multiple fronts, not least of which is labor supply.

COVID-related deaths in the US are running at almost 1,500 on a bad day.

Meanwhile, evictions loom for millions of Americans despite piecemeal, state-level efforts to forestall a crisis and the expiration of pandemic unemployment programs this week means nearly eight million people are losing extra benefits while an additional three million will lose access to a $300 weekly federal supplement.

None of that bodes particularly well for consumption, and neither do rising prices. Consumer sentiment crumbled in August (figure below).

In their assessment, Goldman quantified a slight deceleration across a number of familiar metrics. “Last month, we lowered our 2021Q3 consumption forecast, reflecting declines in forward-looking indicators that pointed to a pullback in services spending,” the bank said, on the way to noting that “since then… activity in virus-sensitive services has slowed [with] OpenTable data show[ing] a 3% decline in restaurant reservations, subway ridership edg[ing] down from already low levels, and airport throughput declin[ing] roughly 5% since the start of August.”

The bank’s take (which Goldman described as a “best guess”) on the Delta wave wasn’t dire. Cases should start falling later this month based on the European experience and receding positivity rates, while economic activity is now “less sensitive to the virus,” as consumer behavior evolves and the vaccination campaign materially reduces the odds of draconian lockdowns — or at least it does in the world’s largest economy, if not in the world’s second-largest.

But even if the Delta wave finally abates, Goldman sees two stumbling blocks for consumption. “We have long expected that the fiscal impulse will turn sharply negative through end-2022,” the bank’s Ronnie Walker said, adding that the annual rate of emergency transfers peaked at nearly $5 trillion in March, helping push disposable income almost 10% above the pre-COVID trend. By July, that figure was just 3%, and Goldman sees further income contraction in the fourth quarter.

As the figure (above, from Goldman) suggests, some of that should be replaced by wage income as the labor market heals and workers receive higher pay. We’ll see.

When it comes to the excess savings argument (a pillar of any constructive outlook for consumption) Goldman admitted it’s difficult to make predictions given the lack of precedent. “Households have accumulated $2.5 trillion in excess savings since the start of the pandemic, equivalent to roughly 15% of a year’s worth of disposable income, or 18% of 2021 consumption [and] that should dampen the drag from income normalization,” Walker remarked, before conceding that “it is hard to know what share of these savings will be spent, as the era of modern economic statistics provides little useful precedent.”

If we assume consumers will rotate back to services spending (and the US is a services-based economy, so we pretty much have to assume that otherwise it’s not clear what we’re left with), there are still notable shortfalls in many categories, especially those “associated with large crowds and high virus risk… or connected to office-based work,” as Goldman put it, while describing the visual (below) which shows that “although the eight leftmost service categories only account for a moderate share of total consumption, cumulatively they have lowered total spending by 2% relative to trend.”

Ultimately, once you pick your way through 14 pages of somewhat tedious analysis, there are two main takeaways from Goldman’s updated assessment on the US economy.

The first is that the rotation from goods spending to services spending will probably play out on a delay, leading to “more gradual and backloaded consumption growth following a decline in Q3.”

The second (related) takeaway is that revisions to the bank’s consumption and inventory accumulation projections imply 3.5% growth this quarter, around half of consensus. Goldman’s growth forecast for 2021 is now 5.7%, down from 6% (consensus is at 6.2%).

The good news, the bank reckoned, is that “lower growth in 2021 implies stronger growth in 2022.”

Virus permitting, of course.