Goldman Sachs has raised concerns about the declining purchasing power of the American paycheck, a trend that is quietly eroding the financial stability of workers despite a strong labor market. According to a recent research note by economists Manuel Abecasis and Joseph Briggs, real personal income per worker—adjusted for inflation and excluding government transfers—fell by 0.6% over the past year. This decline is described as 'rarely seen outside of recession,' with similar drops occurring only during brief periods of inflation shocks or tax-policy distortions.
Culprits Behind the Decline
The primary drivers of this erosion include tariffs on goods, rising energy costs, and wage growth that has failed to keep pace with inflation. These factors have effectively made most Americans poorer in real terms, despite job growth and a resilient labor market. Goldman Sachs highlights that lower-income households, which allocate a larger portion of their budgets to food and energy, are bearing the brunt of this financial squeeze.
'Lower-income households are facing headwinds that higher earners can more easily absorb,' the report notes.
Consumer Resilience and Its Limits
Despite the income squeeze, consumer spending has remained steady, buoyed by larger-than-usual tax refunds earlier this year and a declining personal savings rate, which dropped to just 2.6% in April. However, Goldman Sachs warns that this resilience is temporary. As the effects of tax refunds fade and savings rates hit historic lows, the cushion supporting consumer spending is rapidly disappearing.
The firm forecasts a slowdown in real consumer cash-flow growth to just 0.3% year-over-year by the fourth quarter. Additionally, consumer spending growth is projected to be a modest 1.3% for the remainder of 2026, below both consensus expectations and Goldman’s estimate of the economy’s potential growth rate. Real income growth for the full year is expected to be only 0.9% on a Q4/Q4 basis, signaling a challenging economic environment ahead.