NRF says economy ‘rebalanced’ but ‘extreme cooling’ looks unlikely

The Federal Reserve faces “a delicate task” to fight inflation, but continued growth in jobs, wages and consumer spending makes the effort unlikely to backfire in a major setback for the economy, National Retail Federation Chief Economist Jack Kleinhenz said today.

“With changes underway that aim to bring inflation under control without busting the economy, the country’s economic system is being rebalanced in a way that will test its resilience,” Kleinhenz said. “This is an extraordinary time with unprecedented factors including inflation at its highest level in 40 years, uncertainty surrounding the war in Ukraine, supply chain disruptions and rising interest rates by the Federal Reserve There are good reasons why businesses, consumers and policymakers are all feeling uneasy.

“Although many people fear an extreme cooling of the economy, there isn’t an overwhelming amount of evidence to support such predictions,” Kleinhenz said. “Overall, the data suggests that we remain in a continued expansion.”

Kleinhenz’s remarks appeared in the June issue of NRF’s Monthly Economic Reviewwho noted that the latest Blue Chip Economic Indicators survey of economists projects gross domestic product to grow 2.6% this year and another 2.1% in 2023.

After climbing 5.7% in 2021, GDP contracted 1.5% in the first quarter of this year, the first quarterly decline since the pandemic-plagued second quarter of 2020. But Kleinhenz said “there is less cause for concern than the figure suggests”. Consumer spending rose 3.1% year-on-year, while business investment rose 9.2% as the drop in GDP was linked to international trade balances, inventories and spending public.

The labor market is a key driver of consumer spending, and 428,000 jobs were added in April, topping the 400,000 mark for the 12e months in a row. Unemployment was 3.6%, slightly above the 50-year low of 3.5% in February 2020 just before the pandemic hit much of the economy. The employment cost index showed wages rising 5% from the first quarter of 2021, not enough to keep up with inflation, but the highest figure in nearly two decades.

April retail sales as calculated by NRF – excluding car dealerships, gas stations and restaurants to focus on major retail businesses – rose a seasonally adjusted 0.9% from March and 6.4% year-on-year. On a rolling three-month average, sales were up 7.1% year over year.

Consumer spending is shifting from a pandemic-era focus on goods to services, as people re-engage in activities they had cut back on. Data from S&P Global Economics shows that out-of-home “mobility” in retail and leisure was just 11% below its pre-pandemic trend in mid-April and other measures such as the number diners in restaurants, air traffic and hotel occupancy is close to 2019 rates.

The Fed raised interest rates by half a percentage point last month, following a quarter-point increase in March, and said it was reducing its holdings of Treasuries, bonds, notes and other government securities, all in an effort to tighten monetary policy and slow inflation.

“The Fed has a delicate job to do,” Kleinhenz said. “Rising interest rates will mean higher borrowing costs across the economy, while rising prices continue to erode the purchasing power of the American consumer. But the central bank must act to prevent inflation from spreading through the economy and to reduce the risk that inflation expectations will become more anchored.

These measures have shown signs of easing public concerns. While the rate of inflation expected by consumers in the short term has increased, long-term expectations are subdued.

About the FRN

The National Retail Federation, the world’s largest retail association, is a passionate advocate for the people, brands, policies and ideas that help retail thrive. From its headquarters in Washington, DC, NRF empowers the industry that fuels the economy. Retail is the nation’s largest private sector employer, contributing $3.9 trillion to annual GDP and supporting one in four jobs in the United States – 52 million American workers. For more than a century, NRF has been the voice of every retailer and every retail job, educating, inspiring and communicating the powerful impact retail has on local communities and global economies. NRF.com

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