American Consumers: How Are We Doing?

Our colleagues in Goldman Sachs Research keep a close eye on the welfare of the American consumer in good economic times and bad. So how are we doing in the volatile early months of 2023?

Research says we’re fairly healthy. Here’s a look at the key categories of our national financial health.

Spending

We’re in the stores, and we’re spending money. Real (adjusted for inflation) consumer spending grew at a firm pace in February (2.5% year over year). More recent data has been weaker however, as nominal (not adjusted for inflation) retail sales declined by 1.0% (month over month) in March.

Despite the weak March data, our  economists continue to see consumer spending as a source of strength in our economy and forecast that real spending growth will grow by +2.2% on a Q4/Q4 basis this year.

Employment

Workers are still enjoying a hot – but not quite as hot -- job market, as payroll employment increased by 236,000 in March. Layoff rates remain low, compared to their historical average. The jobs-workers gap – the difference between the number of open positions and the number of unemployed jobseekers – is still signaling a very tight labor market, but the gap has fallen from a high of 6 million to about 3-4 million.

Our analysts expect that the labor market will remain tight for the foreseeable future. They forecast the unemployment rate will only inch up to 3.6% by year-end 2023 and remain at that level at year-end 2024.

Income

We’re seeing more money in our checks. Real disposable income grew at a very rapid 7.7% pace (3-month average annualized) in February, partly reflecting Social Security cost-of-living adjustments and tax changes. Income growth should slow in the next few months as pandemic emergency food stamp and Medicaid benefits end, however, and lower tax refunds are expected in 2023 vs. 2022.

Still, our colleagues are forecasting 3.75% real (adjusted for inflation) income growth in 2023, with increases across all income levels .

Wealth

Our household balance sheets remain strong. But our economists estimate we’ve spent about 40% of the extra savings accumulated during the pandemic period and will have spent almost 60% by the end of the year.

The boost to economic growth from the high wealth levels of the past few years may be mostly behind us. Wealth levels are still elevated enough, however, to help keep us spending in the face of inflation and other economic headwinds.

Our colleagues forecast that the saving rate will rise from its current level of 4.6% to 5.1% by year-end.

Debt

Our race to borrow is slowing a bit. Consumer credit growth showed signs of cooling in February (7.6% year over year) after growing at an extremely fast pace in 2022 and early 2023.

Right now, the amount of credit we’re using, the costs for using it and the delinquency rates are low, by historical standards. But some signs of stress are starting to show: Credit card delinquency rates for younger borrowers have now climbed above their pre-pandemic levels.

Consumer confidence

The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence that asks people how they feel about their personal finances, the economy, business conditions and prices. The index ticked up in April but remains severely depressed.

So, we may be doing all right, but we don’t seem to be feeling great about it. We’re likely influenced to a large extent by the highly visible realities of rising prices and volatile markets.

But that’s why it’s important to look at the positives as well: In the areas of employment, income, wealth and debt, the American consumer is in a historically strong position.