Key facts
- Goldman Sachs warns higher interest rates could reduce consumer spending.
- The bank attributes this to a diminished wealth effect, where people spend less as asset prices like stocks decline.
- The 10-year US Treasury yield, a key borrowing cost indicator, reached its highest level since 2002.
- Goldman Sachs expects higher rates to slow consumer spending growth by 0.2 percentage points in 2027.
- Residential real estate investment growth could fall by up to 2 percentage points in 2027 if rates remain elevated.
- Capital expenditures are projected to decrease by 0.3 percentage points.
Goldman Sachs economists are closely watching the impact of rising interest rates on the broader economy, with a particular focus on how these higher borrowing costs could dampen consumer spending. The bank's analysis suggests that pressure on stock markets, driven by elevated rates, may lead to a reduced "wealth effect" – the tendency for consumers to spend more when asset prices, such as stocks and housing, are increasing.
The 10-year US Treasury yield, a benchmark for borrowing costs across the economy, surged to its highest point since 2002 on Wednesday. While Goldman Sachs' base case anticipates a single rate hike by the Federal Reserve by year-end and a subsequent decline in the 10-year yield to 4.4% over the next year, the firm acknowledges that tighter financial conditions are still anticipated for the US.
Economist Pierfrancesco Mei noted in a client note that higher rates are expected to negatively affect consumer spending by reducing the appetite for credit financing, which could slow demand for significant purchases like automobiles. Goldman forecasts that elevated rates could slow consumer spending growth by approximately 0.2 percentage points in 2027. Mei also indicated that if equities remain relatively flat through 2027 due to higher rates, the absence of a positive wealth effect could lower consumer spending growth by just under 0.5 percentage points.
Beyond consumer spending, the bank also highlighted potential impacts on other interest-rate-sensitive sectors. Residential real estate investment growth could see a decline of up to 2 percentage points by 2027 if rates persist at current levels. Additionally, capital expenditures, which have been crucial for the AI sector, are expected to decrease by 0.3 percentage points.