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