Broken record time but, hey, what can you do, right?

The knock-on effects from 2023’s recovery in household wealth will likely manifest in consumer spending across the world’s largest economy this year, particularly in the event stocks rise in line with Wall Street’s forecasts and home prices manage to post a respectable gain.

That’s according to… well, to common sense, but also to Goldman’s Elsie Peng who, in a new piece, noted that total household net worth as a share of disposable income is back near record highs after recovering 2022’s decline. Increases, Peng said, “have been broad-based across the income distribution.” The figure below shows the evolution of cumulative household wealth since the onset of the pandemic.

Note that although household wealth fell in Q3 “thanks” to a $1.7 trillion decline in the value of equity holdings, Q4 was surely much better given the “everything rally” that transpired in November and December. (Q3 is the most recent update on the Fed’s data. It was released on December 7.)

As resilient as consumption was in 2023, Goldman suggested it might’ve been even more robust were it not for the drag from 2022’s negative wealth effects. That drag “is now behind us,” Peng wrote.

Goldman sees household wealth gains boosting quarterly annualized consumption growth by 0.4ppt this year, assuming David Kostin’s projection for equities to rise 7% proves a semblance of accurate and also assuming property prices rise 5% by year-end.

The downside to that is straightforward: More spending could conceivably prevent inflation from normalizing as quickly as the Fed would like. “We note many parts of the economy that, so far, have proven robust or even impervious to rate hikes,” BofA said, in a January 9 note.

The bank cited “record government deficits, high household savings, rising wages and record home prices” as well as “corporates cushioned by private credit and cash.”

The figure above suggests some key measures and metrics are at least one, and in most cases two, standard deviations above long-term averages.

Of course, there are no guarantees. In the same Goldman note, Peng wrote that in a “downside scenario in which equity and home prices decline at annual rates equivalent to their historical 10%iles” which would entail a 20% drop in stocks and a 4% correction in home prices, the drag on consumption growth would be around 0.5ppt.

In a sunny case where stocks rise 20% and home prices post a double-digit gain, consumption growth would get a near 1ppt boost on Goldman’s estimates.

The problem with the sunny scenario is that it might be too hot for the Fed’s liking.

“Longer-term investors should consider whether Fed rate cuts this year might reignite structural inflationary forces,” BofA remarked.