The U.S. consumer faces a “critical moment” waiting to hear what could happen next “as inflation continues to ease and the Federal Reserve decides when it will lower interest rates, according to analysis from National Retail Federation Chief Economist Jack Kleinhenz, in the latest NRF’s Monthly Economic Review for July 2024.
“Today we’re waiting once again,” Kleinhenz said, referring to a point in 2017 when economists were waiting to see if fast economic growth and low unemployment would cause an increase in inflation. “Much like 2017, the economy is going strong, and the labor market is still relatively tight. But this time, we’re waiting for inflation to come down, and we’re also waiting for the Federal Reserve to decide on when to lower interest rates.”
As it has over the past two years, he said the Fed must balance using high interest rates to reduce inflation with the risk that keeping rates too high for too long could slow the economy to the point of recession.
“We’re at a critical moment as consumers, businesses, investors, and others wait to learn how they will need to adjust their plans for future economic conditions,” Kleinhenz added. “Fortunately, the risks for monetary policy look balanced at the moment.”
Kleinhenz’s comments are in the July issue of the NRF’s Monthly Economic Review, which reports year-over-year gross domestic product growth dropped from 3.4 percent in the fourth quarter of 2023 to 1.4 percent in the first quarter of 2024, its lowest since the spring of 2022. A key contributor to the deceleration was slower consumer activity, a goal of high interest rates intended to curtail inflation without causing a recession.
According to the report, year-over-year inflation, as measured by the Personal Consumption Expenditures Price Index, dropped from 3.4 percent in the first quarter of 2024 to 2.6 percent in May 2024, the second month of the second quarter. Most of the inflation came in the price of services, up 3.9 percent in May, while prices for goods were down 0.1 percent.
“The Fed likely welcomed data that showed household income, spending and savings were all healthy in May, demonstrating that the economy is growing at a slower-but-steady pace,” Kleinhenz said. “The U.S. economy looks resilient enough for the Fed to wait and has afforded the Fed time to do so.”
According to the NRF’s report, Disposable Personal Income was up 3.7 percent year-over-year in May, while Personal Consumption was up 5.1 percent and the savings rate rose to 3.9 percent, its highest level in four months. In addition, Kleinhenz said the labor market “continues to display resilience” and has driven income growth ahead of inflation. Employment rebounded strongly in May, gaining 272,000 jobs following a 165,000 job increase in April. Average monthly job gains through May 2024 were 248,000, just under the 2023 average of 251,000.
The University of Michigan’s Consumer Sentiment Survey for June 2024 found concerns about the effect of high prices and slowing wage growth on families’ finances but that consumers were confident inflation would continue to moderate.
To read the NRF’s Monthly Economic Review for July 2024, go here.
