After a better-than-expected performance in 2023, what happens with the economy in 2024 could depend largely on the labor market and what the Federal Reserve does with interest rates, said National Retail Federation Chief Economist Jack Kleinhenz.
“Federal Reserve officials have tough policy choices ahead as they decide on what to do and when,” Kleinhenz said. “There is still a risk that keeping rates too high could curb the economy’s momentum more than necessary. Yet if they lower rates too soon, it could allow the economy to re-inflate and make it harder to contain inflation pressures.
“I remain of the view that consumer spending will continue to grow, but at a rate slightly below overall GDP growth. Consumers were in decent shape heading into the holiday season, but the labor markets, while unlikely to unravel, do look likely to cool, which would impact consumer expectations and, in turn, affect spending decisions.”
Kleinhenz’s comments came in the February issue of NRF’s Monthly Economic Review, which said the economy “has been more resilient than expected” and shows “no sign of a recession,” citing the 3.3 percent annual growth in gross domestic product for the fourth quarter and 2.5 percent for the year. Disposable personal income was up 6.9 percent year over year in December and retail sales as defined by NRF—excluding automobiles, gasoline stations, and restaurants to focus on core retail—were up 3.3 percent. November-December holiday sales were up 3.8 percent over 2022, easily meeting NRF’s forecast for 3-4 percent growth.
The Personal Consumption Expenditures Price Index—the Fed’s preferred measure of inflation—was at 2.6 percent year over year in December, down “meaningfully” from 5.5 percent at the beginning of the year. January retail sales haven’t been reported yet, but consumer sentiment was at its highest level in nearly three years as shoppers appeared to be more upbeat about the economy, income, and employment.
Kleinhenz said part of the recent pace of economic growth and lower inflation may be explained by a sharp acceleration in productivity. Non-farm productivity, which measures hourly output by worker, increased at an annual rate of 5.2 percent in the third quarter, its fastest growth in three years. Gains in productivity help mitigate inflation fueled by supply issues in particular because producing more goods and services in a shorter time reduces unit costs and raises supply.
Kleinhenz noted that the Bureau of Labor Statistics recently introduced experimental measurements of retail output and labor productivity intended to provide a fuller understanding of the industry given significant changes such as many retailers developing their own e-commerce platforms, fulfillment centers, and distribution networks. He cited analysis by Harvard Business School Professor Ananth Raman, who has examined the new data and says retail productivity has outperformed non-farm productivity as a whole and has exceeded manufacturing productivity in particular. Gains in productivity have been uneven, however, with clothing stores increasing sales per hour of labor dramatically while grocers have seen only small increases.
“While productivity growth offers positive news regarding economic growth and the goal of reducing inflation, there is not enough evidence to be sure it will continue,” Kleinhenz said. As Fed Governor Christopher Waller recently noted, productivity growth has averaged 4 percent over the past two quarters—double the long-term rate—but the average annual rate of 1.4 percent each quarter since the beginning of the pandemic is about the same as for the past 15 years.
While the Fed left interest rates unchanged this week, the central bank has said consistent and cumulative evidence of inflation easing is necessary before rate cuts will be considered.
“Weaker job and wage growth would provide part of that evidence and support shifting toward rate cuts to support the economy,” Kleinhenz said. “On the other hand, if hiring slows too much it could challenge the economy and strain many households further given how long they have been dealing with high inflation. Striking the right balance remains the challenge.”