Goldman Cuts US GDP Forecast. Cites Consumer Slowdown

“Alternative data” suggests US consumer spending slowed over the past several weeks, “perhaps” in response to elevated inflation and tighter financial conditions, Goldman’s Spencer Hill said, cutting the bank’s Q2 GDP forecast for the world’s largest economy.

Generally speaking, analysts are still confident that “excess” savings buffers accumulated over the pandemic, robust jobs gains and the hottest wage growth in decades will be sufficient to sustain consumption, and thereby support growth. But, as Hill wrote, in a note released over the weekend, Goldman is now “assuming a deceleration in services spending in May and June.”

Indeed, the bank projects “an outright decline” in retail spending this month. The figures (below) illustrate the point.

The bank’s forecast for real consumption growth is 1.8pp below GDPNow.

Recall that although Q1’s contraction came courtesy of drag from trade and inventories, spending missed estimates. Rarely do you hear that mentioned.

At 2.7%, personal consumption was still healthy, but notably weaker than the forecasted 3.5%, and barely better than Q4’s pace (figure below).

As I wrote last month, that bodes poorly. Survey after survey shows perceptions of buying conditions are the worst they’ve been in decades. And wage increases aren’t keeping pace with inflation.

“The 10-year low in consumer sentiment in early May suggests some of [the weakness in spending] could continue,” Goldman remarked, referencing Friday’s very poor preliminary read on the University of Michigan gauge. Perceptions of buying conditions for durables were the worst ever in the survey.

That said, Goldman’s forecast for overall Q2 GDP growth (2.5%) is still above the Atlanta Fed nowcast projection (1.8%) even after this weekend’s 0.4pp cut. The discrepancy is entirely due to the bank’s view that imports will normalize after March’s anomalous spike, which Hill said may have reflected front-loading as buyers prepared for additional supply chain disruptions. Additionally, Goldman sees a smaller drag from inventories versus the nowcast model. US automakers, Hill said, should be relatively resilient despite headwinds from the war and China’s COVID lockdowns.

I’d gently suggest that if market participants were expected to look through the drag from trade and inventories in Q1, focusing instead on consumption as a better indicator of underlying economic vitality, then a consistent interpretation of the outlook for Q2 will similarly prioritize the trend in consumer spending. If that’s a fair assessment, any indication that consumption is slowing in the face of surging prices and negative real wage growth is bad news. Especially with the Fed committed to tightening and mortgage rates accelerating.

Goldman’s GDP forecast adjustment came on the heels of a cut to the bank’s S&P target. David Kostin now sees only modest upside for US equities between now and year end, and no upside over the next three months.