The National Retail Federation’s (NRF) Chief Economist Jack Kleinhenz believes consumers spent more in 2023 than expected amid high inflation and interest rates, but spending growth would likely slow in 2024.
Kleinhenz’s observation and assessment were published in the NRF’s Monthly Economic Review presented this week. He also noted in the review that the tailwinds were not necessarily sustainable.
“Tighter credit conditions along with higher borrowing costs continue to be in place now that we’ve turned the page on the annual calendar, and employment reports confirm that the labor market expansion is slowing,” Kleinhenz said.
Kleinhenz’s comments are part of the overall Monthly Economic Review that also suggested 2023 spending was supported by a tight labor market, a “wealth effect” from a rise in equity and home prices and savings accumulated during the pandemic.
Inflation-adjusted gross domestic product grew a “solid” 2.3 percent over 2022, December’s unemployment rate of 3.7 percent was one of the lowest in decades, and the 4.5 percent year-over-year increase in wages outstripped the year-end 2.6 percent inflation rate as measured by the Personal Consumption Expenditures Price Index followed by the Federal Reserve.
Unadjusted for inflation, consumer spending was up 5.2 percent year-over-year in October and November, boosted by a 7 percent year-year-over increase in disposable personal income. Core retail sales, excluding auto dealers, gas stations and restaurants, were up 3.7 percent year-over-year for the first 11 months of the year.
Despite that trend, job openings fell to 8.79 million in November, the lowest level since March 2021. And while the Labor Department reported non-farm payroll growth of 216,000 jobs in December, the net growth in private-sector jobs was only 68,000 after accounting for downward revisions to previous months’ job growth. Another market observer noted that the vast majority of jobs came from government positions, not the private sector.
“The labor market looks set to cool further this year, which will impact consumer expectations for employment and wage growth and, in turn, affect spending decisions,” Kleinhenz said. “Spending is elevated relative to current income, and maintaining the recent pace of growth will be increasingly difficult.”
Pandemic savings that boosted spending in 2023 are shrinking; revolving debt has risen to pre-pandemic levels; and consumer confidence has increased but remains low.
Recent surveys indicate that consumers are worried by several factors, including the outlook for income, business and job market conditions slowing because of higher interest rates, ongoing inflation and political stressors.
Kleinhenz said a crucial question in the outlook is what the Fed will do with interest rates. The central bank has indicated that rate hikes are likely over and that the benchmark federal funds rate, currently at 5.25 percen to 5.5 percent, could be cut to 4.6 percent by the end of 2024.
To read the NRF Monthly Economic Review and relevant data, go here.
Images courtesy City Business, NRF/Ian Wagreich
