US consumers are still buying more than last year, but spending growth is slowing as the economy settles down amid higher interest rates intended to reduce inflation, according to National Retail Federation (NRF) Chief Economist Jack Kleinhenz.
“The economy was clearly more resilient in the first half of this year than many expected, and the consumer environment has been positive as inflation has slowed,” Kleinhenz said. “Nonetheless, there are ongoing economic challenges and questions, and the pace of consumer spending growth is becoming incrementally slower.
“Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services. While job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available.”
Kleinhenz’s comments came in the August issue of NRF’s Monthly Economic Review, which said gross domestic product grew at a 2.4 percent annual rate adjusted for inflation in the second quarter. That was up from 2 percent in the first quarter but in line with 2.1 percent for all of 2022 and far below the 6 percent seen in 2021.
Consumer spending, which makes up about 70 percent of GDP, played a major role in the continued expansion. But year-over-year spending growth slipped from 4.2 percent in the first quarter to 1.6 percent in the second. Retail sales as calculated by NRF—excluding automobile dealers, gasoline stations and restaurants—were up 3.1 percent unadjusted year over year in the second quarter. That kept up with inflation but was below the 4 percent growth for the first six months of the year.
The Personal Consumption Expenditures Price Index—the Federal Reserve’s preferred measure of inflation – was at 3.7 percent year over year in the second quarter. That was down from 4.9 percent in the first quarter but still far above the Fed’s target of 2 percent. The Fed responded by raising rates another quarter-point last month to a range between 5.25 percent and 5.5 percent, the highest level since January 2021.
While the Fed still faces “a tricky job” in trying to control inflation without triggering a recession, “the current framework clearly increases the chance of a slower economy,” Kleinhenz said.
The full impact of rising interest on the economy is difficult to predict but revolving credit (mostly credit cards) contracted by nearly $1 billion in June and consumers are less likely to use credit cards to fund purchases as rates rise, Kleinhenz said.
The labor market is also in lower gear. The 185,000 jobs added in June was the lowest number since mid-pandemic in December 2020 and the 187,000 jobs added in July was only slightly better. There were 9.58 million job openings in June, down slightly from 9.62 million in May.