"Soft landing" secured? Goldman Sachs raises US GDP forecast for 2024 to 2.4%

The US non-farm payroll employment surged in January, and the GDP in the fourth quarter of last year far exceeded expectations. A series of data indicates that the US economy still has resilience. How will the US economy perform in 2024? Will the expected "soft landing" be achieved?

Goldman Sachs, which has always been optimistic about the US economy, once again raised its economic forecast for the US in its report last week. It pointed out that given the recent economic growth momentum, the forecast for GDP growth in 2024 was raised by 0.3 percentage points to 2.4%, far higher than the general forecast of 1% and the Federal Reserve FOMC forecast of 1.4%.

At the same time, Goldman Sachs updated its sub-category forecasts for consumer spending, business investment, housing, and inventory cycles. Consumer spending (2.5% vs 1.1%), business investment (2.5% vs 1.2%), and housing (4% vs 1.2%) are all much higher than consensus expectations.

Goldman Sachs pointed out that driven by the growth of consumer spending, the GDP in the first half of 2024 is expected to be 2.6%. In the second half of the year, the decline in mortgage interest rates will drive housing sales, but the growth of capital expenditure related to the IRA and CHIPS bills will slow down. The GDP in the second half of 2024 will slow down to 2.2%. In addition, the unemployment rate in 2024 is expected to remain unchanged at 3.6%.

Income Growth Drives Consumption

Goldman Sachs pointed out that driven by continued growth in real income, consumer spending in 2024 will remain strong, with a slight slowdown from 2.6% in 2023 to 2.5% in 2024, far exceeding the consensus expectation of 1.1%.

US consumer spending grew rapidly in November and December last year, and the strong momentum will continue into the first quarter. Based on the situation in the fourth quarter of last year, consumer spending is expected to grow by 3.4% in the first quarter.

The strength of consumer spending is mainly driven by the growth of real income. Due to stable growth in real wages and employment, it is estimated that real household income will grow by 3.2% in 2024.

Labor income growth contributes about 2% to total income growth, while interest income growth contributes about 1% to total income growth. However, due to the end of pandemic-related fiscal expansion and a decrease in healthcare coverage, transfer income may face some headwinds.

In addition, in terms of income distribution, Goldman Sachs expects that the consumption growth of high-income households will be stronger than that of low-income households, as their real income in 2024 may increase more, partly due to an increase in interest income and more moderate inflationary pressures.

Short-term Headwinds for Business Investment

Regarding business investment, Goldman Sachs pointed out that it may face short-term headwinds, but the long-term prospects are bright. It is expected that business investment will grow by 2.5% in 2024, compared to the consensus expectation of 1.2%. Manufacturing business investment increased by nearly 4% in 2023, supported by the Inflation Reduction Act (IRA) and the CHIPS Act subsidies. However, this boost may turn into a drag in 2024. Once these factories are completed, the increase in equipment investment should partially offset the drag.

A looser financial environment and the fading concerns of a recession will further drive business investment growth in the coming quarters.

The housing market is expected to recover. Goldman Sachs believes that with the decline in mortgage rates, existing home sales will rebound significantly. Residential investment is projected to grow at a rate of 6% in the first quarter of 2024, followed by a more moderate growth rate of around 3% in the subsequent quarters. This implies a 4% growth in residential investment in 2024, compared to the market expectation of 1.2%.

As mortgage rates continue to decline, it will further support the recovery of residential investment in 2024. When mortgage rates rise above 7%, existing home sales drop to the lowest level since the financial crisis. However, in the past few months, mortgage rates have fallen to 6.6%. Our strategic team expects further normalization in 2024, driven by the narrowing spread between mortgage rates and government bond yields.

Goldman Sachs points out that this indicates that existing home sales (and brokerage fees) should rebound significantly from the low point in the first half of 2024. Residential construction should shift towards single-family homes, and renovations should gradually increase with the rebound in home sales.

Due to the continued growth of single-family home construction, the net growth of residential construction will increase. Currently, the vacancy rate remains extremely low and prices remain high. After the apartment construction boom in the past few years, moderate growth in multi-family home construction should partially offset the impact.

In terms of inventory investment, Goldman Sachs suggests that the adjustment caused by excessive inventory accumulation seems to have basically ended, and inventory investment should gradually return to normal in 2024. There are three pieces of evidence supporting this view:

First, except for the automotive industry, the inventory-to-sales ratio has basically returned to pre-pandemic levels. The inventory rebuild in the automotive industry is expected to continue in 2024.

Second, inventory investment began to recover in the second half of 2023.

Third, components related to inventory in manufacturing surveys (which track the inventory investment component of GDP well) may experience a slight decline in the short term (first quarter of 2024), and then gradually return to normal levels.

Goldman Sachs predicts that the short-term decline in inventory investment may drag down GDP growth by around 0.7 percentage points in the first quarter of 2024. However, the gradual recovery in the following quarters may offset this drag, resulting in a roughly neutral contribution to growth in the fourth quarter of 2024.