Goldman Sachs economists are warning that the remarkable resilience of American consumers may be nearing its limits, with spending growth expected to turn sluggish in the second half of the year as the temporary boost from larger-than-expected tax refunds fades away.
In a note to clients, Goldman Sachs chief economist Jan Hatzius laid out the case for a meaningful deceleration: real consumer spending growth is projected to slow to an annualized pace of 1% to 1.5% in the second half, down sharply from the spring surge that helped power the economy through an otherwise choppy first half.
“We expect sluggish consumer spending growth ahead,” Hatzius wrote. “Although Friday’s drop in July retail sales partly reflected the negative impact of an earlier-than-usual Amazon Prime Day, the revised sequential path now looks much more consistent with our view that the strength of real consumer spending in the spring was the temporary byproduct of the tax refund surge.”
U.S. retail sales fell 0.6% month-over-month in July, a notable reversal from the 0.2% gain recorded in June. The decline, while partly distorted by the timing of Amazon’s promotional event, reinforced Goldman’s view that the underlying trend is weakening as household cash flow stagnates.
The second quarter told a different story. Sales at consumer-facing companies rose at a healthy clip, with the median S&P 500 consumer discretionary company posting 5.9% year-over-year revenue growth and the median consumer staples firm up 3.9%, powered by tax refunds that came in above plan. Same-store sales accelerated broadly across retailers serving both lower- and higher-income households.
The strength showed up in the broader economic data as well. Gross domestic product expanded at an annualized rate of just 1.5% in the second quarter, down from 2.1% in the first three months of the year. But beneath that headline deceleration, consumer spending accelerated to a 3.2% annualized pace, up from a sluggish 0.5% in the first quarter, and served as the main engine for underlying private domestic demand. Household expenditures were boosted by spending on both goods and services, particularly prescription drugs, motor vehicles, and food services.
That dynamic is now reversing, according to Goldman’s analysis. With real cash flow stagnating as the tax refund surge dissipates, the consumer engine that accounts for roughly two-thirds of U.S. economic activity is losing momentum. If consumer spending deteriorates further, GDP growth could weaken beyond the already-modest levels seen in the first half.
Not everyone sees the picture as uniformly gloomy. Procter & Gamble CFO Andre Schulten described the consumer as “OK and stable” in a late July interview, though he acknowledged divergent trends within the company’s customer base. Higher-income consumers continue to spend on P&G’s latest innovations, while lower-income shoppers living paycheck to paycheck remain cautious about how they replenish items and which products they pull off the shelves.
The divergence between income cohorts is a recurring theme in the retail landscape. Companies serving affluent customers have generally maintained pricing power and volume stability, while those exposed to budget-conscious households face a more promotional environment and tougher comparisons.
This week will provide a real-time test of Goldman’s thesis, as some of the country’s largest retailers report quarterly earnings and issue forward guidance. Home Depot (HD), Lowe’s (LOW), Walmart (WMT), and Target (TGT) are all on the calendar, with Walmart drawing the most attention given its scale and its third-quarter outlook.
Deutsche Bank analyst Krisztina Katai struck a cautious tone on Walmart ahead of its report. “Incremental sales upside may be difficult to generate in a cautious and potentially more promotional consumer backdrop,” Katai wrote.
The earnings reports will offer investors a window into inventory levels, traffic trends, and management commentary on back-to-school and holiday season expectations. Any signs of margin compression from increased discounting would lend further weight to the idea that the consumer spending cycle has peaked for this cycle.
For the Federal Reserve, a cooling consumer cuts both ways. Slower spending could help ease inflationary pressures in the services sector, but it also raises the risk of a broader economic slowdown at a time when policymakers are still assessing the lagged effects of prior rate hikes. The central bank has signaled it wants to see sustained evidence that demand is moderating before declaring victory on inflation, but a sharper-than-expected pullback in consumption would complicate the soft-landing narrative.
Goldman’s baseline is not a recession call. The firm’s economists are projecting a slowdown, not a collapse, in consumer spending. Still, the trajectory is clear: the second-quarter surge was an anomaly driven by one-time fiscal factors, and the underlying pace of household expenditure growth is reverting toward a more subdued trend that better reflects stagnant real incomes and depleted savings buffers.
The coming retail earnings reports will help determine whether the sluggishness Goldman anticipates is already showing up in company-level results, or whether American shoppers have another surprise in store.