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NRF: Economy ‘Being Rebalanced’ but ‘Extreme Cooling Off’ Seems Unlikely

June 2, 2022

The Federal Reserve faces “a tricky job” in addressing inflation but continuing growth in employment, wages and consumer spending make it unlikely the effort will backfire into a major setback for the economy, National Retail Federation Chief Economist Jack Kleinhenz said today.

“With changes underway that focus on taming inflation without splintering the economy, the nation’s economic system is in the process of being rebalanced in ways that are testing its resilience,” Kleinhenz said. “This is an extraordinary period with unprecedented factors that include inflation at a 40-year high, uncertainty over the war in Ukraine, supply chain disruptions and the Federal Reserve raising interest rates. There’s good reason why businesses, consumers and policymakers alike all feel uneasy.”

“Though many people fear an extreme cooling off of the economy, there is not an overwhelming amount of evidence to support such predictions,” Kleinhenz said. “In general, the data suggests that we remain in an ongoing expansion.”

Kleinhenz’s remarks came in the June issue of NRF’s Monthly Economic Review, which noted that the latest Blue Chip Economic Indicators survey of economists projects that gross domestic product will climb 2.6 percent this year and another 2.1 percent in 2023.

After soaring 5.7 percent in 2021, GDP contracted by 1.5 percent in the first quarter this year, the first quarterly decline since the pandemic-plagued second quarter of 2020. But Kleinhenz said “there is less reason for concern than the figure suggests.” Consumer spending was up a “solid” 3.1 percent year over year while business investment was up 9.2 percent, with the GDP drop tied to international trade balances, inventories and government spending.

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 12th month in a row. Unemployment was 3.6 percent, only slightly above the 50-year low of 3.5 percent in February 2020 just before the pandemic shut down much of the economy. The Employment Cost Index showed wages rising 5 percent compared with the first quarter of 2021, not high enough to keep up with inflation but the highest reading in nearly two decades.

April retail sales as calculated by NRF – excluding automobile dealers, gasoline stations and restaurants to focus on key retail – were up 0.9 percent seasonally adjusted from March and 6.4 percent year over year. On a three-month moving average, sales were up 7.1 percent year over year.

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

The Fed increased interest rates by half a percentage point last month, following a quarter-point increase in March, and said it is paring its holdings of Treasury bills, bonds, notes and other government securities, all in an attempt to tighten monetary policy and slow inflation.

“The Fed has a tricky job on its hands,” Kleinhenz said. “Increased interest rates will mean higher borrowing costs across the economy at the same time higher prices keep eroding the purchasing power of the U.S. consumer. But the central bank needs to act in order to prevent inflation from being baked into the economy and to reduce the risk that expectations of inflation will become unanchored.”

The moves have shown signs of easing the public’s concerns. While the rate of inflation expected by consumers in the near term has moved up, expectations for the long term are subdued.

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