After a year of challenges, the economy has proven to be healthy even as it continues to slow, according to National Retail Federation Chief Economist Jack Kleinhenz.
“The US economy is on track to end 2023 with vigorous growth for the year,” Kleinhenz said. “A strong labor market, rising wages, and access to excess savings have helped spending continue despite inflation and higher interest rates.”
Kleinhenz’s comments came in the December issue of NRF’s Monthly Economic Review, which said gross domestic product growth for the year is now expected to come in at 2.5% adjusted for inflation over 2022, “much higher than expected a year ago.”
GDP grew at an annualized pace of 3.2% over the first three quarters and shot up 5.2% in the third quarter but is expected to slow to 1.2% in the fourth, according to the Federal Reserve Bank of Atlanta’s GDPNow model.
Gross domestic income—which goes beyond the value of products produced to include wages, rent, interest, and corporate profits earned during production—was up only 1.5% in the third quarter, also adjusted for inflation, following 0.5% in the second quarter. It was the fourth consecutive quarter in which GDI grew less than GDP, which Kleinhenz said “adds to the argument that the economy is slowing” even though neither indicates that growth has halted.
Slower GDP and GDI growth is in line with consumer spending, which rose only 0.2% month over month in October, down from 0.7% in September for the slowest pace since May. Similarly, retail sales reported by the Census Bureau were down 0.1% month-over-month seasonally adjusted in October after a 0.9% increase in September and year-over-year retail sales growth fell from 4.1% unadjusted to 2.5%. Households have reduced spending on automobiles, furniture, and clothing but are spending more on travel, health care, and housing.
Kleinhenz said the “resiliency of the consumer is being tested” by a number of factors beyond inflation and interest rates. Excess liquidity built up during the pandemic is shrinking and access to credit has become more expensive as banks have become more cautious, with both curbing the purchasing power fueled by job and wage gains. Hiring held steady in October, but job openings were at their lowest level since March 2021 and unemployment was at its highest level since March 2021.
On the positive side, the Personal Consumption Expenditures Index —the measurement of inflation followed by the Federal Reserve—was at 3% year over year in October, the lowest level in two-and-a-half years. Overall finances are in “good shape” and personal spending rose 5.3% year over year in October while disposable personal income grew a “healthy” 7%.
Consequently, “continued consumer resilience” is expected during the holiday season, which began November 1 and continues through the end of December. NRF expects record spending and has forecast holiday retail sales to increase between 3% and 4% over 2022, consistent with pre-pandemic growth rates.
“The remarkably resilient consumer has been the story of 2023,” Kleinhenz said.