By Leo Bland Goldman Sachs is cutting its US real GDP growth forecast for next year on the back of ...
By Leo Bland
Goldman Sachs is cutting its US real GDP growth forecast for next year on the back of doubts over the sustainability of strong domestic consumer spending.
The group is reducing its 2001 forecast for US real GDP growth to 3.3% from 4% as it believes consumer spending growth is set to slow to between 2.5% and 3% over the next 12 months from around 4%.
Gavyn Davies, chief international economist at Goldman Sachs, said that consumer spending growth has slowed much less than the growth rate in disposable income. He believes this is because earlier rapid gains in the US stock market have bolstered wealth and fuelled spending but disposable income growth has been hurt by the persistent rise in energy prices.
He said: "The gap between consumer spending growth and disposable personal income growth has become very wide. This indicates that consumer spending is vulnerable to any change in the fundamentals that have provided support up to now. After all, the personal saving rate is now at a post-World War II record low. The strain caused by the shortfall of income growth is also evident in the recent rise in the growth rate of consumer installment credit."
According to Davies, the most important fundamental support for sustaining the gap has been the recent strength of the US equity market, but that has seen falls this year. He said: "The ratio of net worth to income is now falling, even as the saving rate is declining. In the past, this has been an unsustainable combination. How far the stock market weakness will translate into softer consumer spending is difficult to assess. But based upon past historical relationships, the positive wealth effect appears likely to peter out quite soon."
Goldman Sachs' research finds that the peak impact of wealth on consumer spending occurs with a lag of around five quarters so the wealth effect in the US should be turning neutral.
Davies said: "The positive boost to spending from the stock market rise during the second half of 1999 should be offset by the dampening impact of the equity market weakness over the past three quarters. Although household net worth has climbed by about 11% over the past four quarters, most of this rise was concentrated in the fourth quarter. Since then, the trajectory of household net worth has flattened out."
Two factors that could change this outlook would include a stock market recovery although Davies observed that even gains of 10% a year in the US equity market would be likely to produce only a mild positive wealth effect on consumer spending. A sharp fall in oil prices and higher wage inflation in the tight US labour market could lead to increased disposable income but he added that this process would take place slowly.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress