Why goods spending isnt falling
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Spencer Hill @GoldmanSachs find bottom 50% wage gains reshape spending patterns: +9.6% real wages since 2017 adds $150-250bn annual purchasing power—sustained goods consumption surge signals structural shift in consumer behavior.
A research note from GS’s Spencer Hill, which finds that real wage levels for bottom 50 percent earners were almost 10% higher than in 2017, supporting sustainably higher levels of consumer spending.
“…In a note to clients published on Sunday, Spencer Hill of Goldman Sachs argues that something has changed. “Sustainably stronger consumer finances” have created fresh spending power for people at the bottom of the income distribution. After adjusting for composition effects, Hill estimates that real wage levels for the bottom 50 percent of earners were 6.2 percent higher in the first quarter of this year than in 2019 — and 9.6 percent higher than in 2017. That implies something like $150bn per year in additional spending power for the bottom half. The number rises to $250bn once you throw in other disposable income sources such as social security payments. This matters for two reasons: lower-income consumers spend more of each extra dollar earned, and they spend more of each extra dollar earned on goods, specifically. So long as bottom-half consumers have money to spend, goods consumption should stay high….”
Robert Armstrong and Ethan Wu, "Why goods spending isn’t falling,"Financial Times, April 25, 2023, https://www.ft.com/content/47002aa9-18b3-4db4-ba34-3bac45d82268
Why goods spending isn’t falling
There is an enigma at the centre of the US economy: what’s up with goods spending?
The conventional story is well known. Fearing a pandemic depression, Congress and the Federal Reserve unleashed enormous fiscal and monetary stimulus. Everyone was afraid of in-person services businesses, so all that money flooded into the goods sector. At the peak, in March 2021, inflation-adjusted goods consumption had shot up 21 percent from pre-pandemic levels, and goods inflation wasn’t far behind. This, though, was transitory. Eventually everyone had their fill of buying dressers and air fryers. Much ink was spilled about the great goods-to-services rotation: goods spending should return to trend as services spending rises. In the last year or so, it’s been all about inflation and spending in services.
But what if that’s wrong? What if real goods spending never falls back to its pre-pandemic trend, but instead plateaus at a higher level? It’s now been three years since lockdowns began and any trend-reversion is hard to spot:
In a note to clients published on Sunday, Spencer Hill of Goldman Sachs argues that something has changed. “Sustainably stronger consumer finances” have created fresh spending power for people at the bottom of the income distribution. After adjusting for composition effects, Hill estimates that real wage levels for the bottom 50 percent of earners were 6.2 percent higher in the first quarter of this year than in 2019 — and 9.6 percent higher than in 2017. That implies something like $150bn per year in additional spending power for the bottom half. The number rises to $250bn once you throw in other disposable income sources such as social security payments.
This matters for two reasons: lower-income consumers spend more of each extra dollar earned, and they spend more of each extra dollar earned on goods, specifically. So long as bottom-half consumers have money to spend, goods consumption should stay high.
Is it sustainable, though? Comparing detailed (but less timely) consumer survey data for 2021 to 2019, Hill argues that it is. Consumer financial distress looks muted by historical standards. More than $1tn in excess savings is still out there. On top of that: "While the $1.6tn increase in consumer goods spending over three years is enormous in absolute terms, it may indeed be sustainable in the context of the $3.3tn rise in disposable income and the proportionately smaller spending increases for services categories on net. The increase in goods spending also does not look as outsized when one considers the strong disposable income growth of the bottom 3-4 income quintiles — recall that data imply a high marginal propensity to consume goods for lower- and middle-income consumers."
In other words, consumers are broadly spending no more than what they’re earning. After stripping out certain (misleading) imputed costs, Hill finds that nominal spending has risen by $3.5tn and nominal income by $3.3tn:
We’ve spent time laying out Hill’s argument because it highlights an important point: the distribution of post-pandemic income gains has macroeconomic implications. If he is right, we’d expect both growth and inflation to be stickier — sharpening the policy trade-off the Fed faces. We’ll have more to say tomorrow, but as a first pass, his case fits with other research finding that inequality hurts demand. This is in part because the rich mostly save their money, and in part because such a “savings glut of the rich” is linked to burdensome consumer debts. That curtailing inequality juices demand seems not too far a leap.