A quarterly survey of 2,000 U.S. consumers by Goldman Sachs analysts shows that “t
he bifurcation between the high and low end continues to widen” in America.
“Consumers in $US90,000+ households saw increased levels of optimism, while consumers in under-$50,000 households declined,” write Goldman analysts Michael Kelter, Ivan Holman, and Harsh Aneja in a new report. “This is, in fact, the widest spread we have seen between these two income groups in our survey.”
And according to the survey, it’s not just economic optimism that is diverging across income groups: actual spending patterns are as well.
“The total number of consumers who said they spent more in the past three months did tick up in our 3Q survey,” say Kelter, Holman, and Aneja. “However, the bifurcation of high vs. low-mid income consumers is clearly evident.
Consumers in $US90,000+ households reported an increase in spending in 3Q vs. 2Q, while consumers in under-$50,000 households reported a decrease in spending this quarter.“
Goldman blames tax hikes that went into effect at the beginning of the year for the continued divergence between low- and high-income earners.
“In our survey 61% of consumers indicated that they noticed the impact of higher payroll taxes on their paycheck,” say the Goldman analysts. “Of those, 42% indicated that they are therefore reducing spending vs. 19% who continue to spend at previous levels.”
Those tax hikes disproportionately fell on spending in low- and mid-income households, who were not buoyed by the “wealth effect” in the same way high-income households were.
“In our view, one of the reasons why high income consumers are likely less affected by the 2013 tax increases is the wealth effect, a dynamic that disproportionately impacts high income groups,” say Kelter, Holman, and Aneja. “90% of consumers with over $US70,000 of income own their own home, while only 50% of those under $US70,000 do. And for those with over $US90,000 of household income relative to those with under $US50,000 of household income, (1) almost 3x as many currently believe the value of their home is rising, and (2) 3x as many specifically say they are comfortable spending because asset prices are rising.”
The analysts estimate the tax hikes reduced disposable personal-income growth this year to 1-2% versus the 3-4% growth rate American households would have likely seen without the tax hikes.
However, given positive underlying fundamentals for income growth, they expect it to bounce back next year:
Looking at the maths behind the 2013 tax increases
— Roughly $US200mn of incremental taxes hit consumers starting in Jan 2013. The payroll tax hike in particular amounted to $US125bn, 60-65% of the total tax increase for the year. This $US200mn compares to roughly $US400-500mn of Disposable Personal Income (DPI) growth in a typical year of late. As such, the 2013 tax increases depressed DPI growth from 3-4% down to 1-2% in 2013. To the positive, once we lap the tax increases starting in 2014, Goldman Sachs economists forecast a rebound back to 3-4% DPI growth.
Underlying DPI fundamentals appear strong
— When we look at the other two primary components of Disposable Personal Income, jobs growth and wage growth, both seem relatively healthy. Jobs creation remains in the 100,000-200,000/month range, inline with the run rate of the last few years and of the expansionary mid 2000’s period. Wage growth remains depressed in absolutes, running in the +2% range, but has inflected and appears to be headed in the right direction for the first time in years.
Goldman economists predict 2014 is the year U.S. economic growth will finally take off after years of disappointing recovery in the wake of the financial crisis.
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