Wall Street is having trouble getting 'too excited' about the US economy

Several factors contributed to the downward revision of US GDP growth estimates by institutions such as Goldman Sachs and the Atlanta Fed. These factors include:

1. Weak spending momentum: Goldman Sachs cited "weak spending momentum to start the quarter" as one of the reasons for lowering its estimate for second quarter GDP to an annualized growth rate of 2.7% from 3.2%.

2. Lower consumption: A decline in the second estimate of first quarter economic growth was largely driven by lower consumption.

3. Manufacturing sector slowdown: A new reading of activity in the manufacturing sector from the Institute for Supply Management (ISM) showed that activity fell further into contraction last month. The ISM's manufacturing PMI registered a reading of 48.7 in May, down from a reading of 49.2, and lower than the 49.5 economists expected.

4. Soft retail sales: A softer-than-projected reading on retail sales in April also contributed to the downward revision of GDP growth estimates.

5. Unemployment rate: The April jobs report showed that US job growth came in weaker than expected, as the unemployment rate unexpectedly ticked higher.

These factors collectively indicate a loss of momentum in the US economy, leading to a downward revision of GDP growth estimates by various institutions.

Major financial institutions like Goldman Sachs have recently adjusted their economic forecasts for the US economy. Goldman Sachs Research, which had been bullish on the economy, lowered its estimate for second quarter GDP to reflect an annualized growth rate of 2.7% from 3.2% on May 24, citing "weak spending momentum to start the quarter." This shift in economic consensus comes as recent data shows activity cooling across various metrics, dampening hopes for an unexpected acceleration in economic growth for a second straight year.

Goldman Sachs Research, in its 2024 US Economic Outlook: Final Descent report, expects GDP to grow 1.8% in 2024 on a Q4/Q4 basis (or 2.1% on a full-year basis), again easily beating low consensus expectations. The firm's economists forecast just under 2% consumption growth, with real disposable income growth of nearly 3% partly offset by a 1pp rise in the saving rate2. They also expect the FOMC to deliver its first rate cut in 2024Q4 once core PCE inflation falls below 2.5%.

The key surprise in the economic outlook has been much stronger than expected GDP growth, which has not prevented the labor market from continuing to rebalance or inflation from continuing to fall3. Despite the adjustments in forecasts, the general expectation is that the US economy will continue to grow, albeit at a slower pace than previously anticipated.