The Real Takeaway From Goldman’s US Growth Downgrade

Markets were back to worrying about peak growth at the beginning of a jam-packed week. With crude sitting near seven-year highs, stagflation stories weren’t hard to come by.

“Fiscal support is set to step down significantly through the end of next year,” Goldman’s Joseph Briggs said, in the course of cutting the bank’s outlook for the US economy. “Consumer services spending will need to recover quickly to offset a decline in goods spending as it normalizes from its current elevated level.”

Those are the “two main challenges” in the medium-term, according to the bank, which now sees Q4 growth of 4.5%, down markedly from 5% previously. For 2022, the bank’s new estimates are 4.5%, 4%, 3% and 1.75% for Q1, Q2, Q3 and Q4, respectively, from 5.0%, 4.5%, 3.5% and 1.5%.

Although Briggs described the downgrades as “mostly offset by upgrades to growth forecasts in 2023 and 2024,” Goldman’s call came at a time when market participants are already predisposed to fretting about the outlook. Goldman is among multiple banks which recently slashed forecasts for the world’s second-largest economy.

The bank expressed palpable concern for the US consumer in September. They incorporated some of those concerns in their updated forecasts.

I’ve warned repeatedly about the potential for services sector spending to be impaired by lingering COVID worries and a semi-permanent shift in consumer psychology. Recall that retail sales data for August showed spending at restaurants and bars was flat.

As I put it at the time, when considered in conjunction with the loss of hiring momentum (figure below), the drop in spending was a bad omen for the pace of normalization in America’s services sector.

A rapid recovery in services spending (to offset a fall in spending on goods, which has to wane at some point) “will likely prove challenging while COVID cases remain elevated,” Goldman remarked, noting that “many people still feel at least somewhat uncomfortable engaging in many activities that were routine prior to the pandemic.”

The bank cited Morning Consult polling in suggesting that for at least some activities, it may be another six months (at least) before consumers revert to pre-COVID spending patterns.

One of the more important takeaways from Goldman’s short update was likely lost on most outlets which covered it. What’s critical is the extent to which some spending patterns are altered forever, not necessarily because consumers are “scared,” but because other shifts brought about by COVID changed lifestyles. For example, the protestations of some high profile executives notwithstanding, remote work is here to stay for some industries. That has implications for services spending.

I’ve mentioned this before, and I’ll reiterate it here: De-urbanization and remote work will mean entire downtown ecosystems in large cities are at risk of slowly dying (think coral reefs) as clientele disappear forever. Many of those businesses operate on razor thin margins with almost no capital cushion. That’s not always the fault of the business owner — it’s just the economics of certain types of businesses. A year ago, I wrote that “the more entrenched the new reality becomes, the harder it will be to go back.”

Speaking to that dynamic, Goldman’s Briggs said the bank “expects spending on some services and nondurables will remain persistently below its pre-pandemic trend, particularly if a shift to remote work results in some workers spending less overall.”

And that’s to say nothing of “early” retirements. On Friday, while sorting through September payrolls, I noted that “for those pondering early retirement, the surge in financial asset prices over the pandemic period might well tip the scales in favor of calling it quits — for good.” That has the same implications for the same endangered ecosystems.

Goldman cited academic literature which suggests spending falls by roughly 5% at retirement “because workers stop paying for things like lunch and instead spend time preparing food at home.” Briggs extrapolated from that. “Assuming a similar increase in home production from remote working, a 10pp increase in remote work, and a 60% employment-to-population ratio implies a permanent 0.3% reduction in overall PCE due to the shift,” he wrote.

In addition, the bank cautioned on falling government transfer income which, at least for some households, will probably lead to retrenchment.

To be sure, Goldman didn’t strike an overtly dour tone. And while Briggs’s note received top billing on Bloomberg’s front page Sunday evening in the US (not to mention a half-dozen references across various quick takes on the terminal), it was just a daily. The entire piece spanned just seven pages, and three of them were disclosures.

As alluded to above, the note was profound seemingly by accident. The most troubling passages are those which received the least media coverage.

On Sunday, while wandering around one of two local marinas, I noticed (again) that the restaurants seemed to be alternating days. It’s far too early for seasonal closures, so I asked a server on a cigarette break. Sure enough, the four establishments (actually three restaurants and one bar) have an agreement. Only two are open on a given day. There isn’t enough business to support all four being open at once and even if there was, there aren’t enough kitchen workers to make the food.