According to the National Retail Federation’s Chief Economist Jack Kleinhenz, after a challenging year, the economy remains healthy despite slowing.

“The U.S. 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 the NRF’s Monthly Economic Review, which said the gross domestic product growth for 2023 is expected to come in at 2.5 percent adjusted for inflation over 2022, “much higher than expected a year ago.”

GDP grew at an annualized pace of 3.2 percent over the first three quarters and increased 5.2 percent in the third quarter but is expected to slow to 1.2 percent in the fourth quarter, 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 just 1.5 percent in the third quarter, also adjusted for inflation, following 0.5 percent 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 align with consumer spending, which rose just 0.2 percent month over month in October, down from 0.7 percent in September, the slowest pace since May.

Similarly, retail sales reported by the Census Bureau were down 0.1 percent month-over-month seasonally adjusted in October after a 0.9 percent increase in September, and year-over-year retail sales growth fell from 4.1 percent unadjusted to 2.5 percent.

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 several 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 are more cautious with curbing the purchasing power fueled by job and wage gains.

Hiring held steady in October, but job openings have been at their lowest level since March 2021, and unemployment has been at its highest since March 2021.

On a positive note, the Personal Consumption Expenditures Index, the measurement of inflation followed by The Federal Reserve, was at 3 percent 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 percent year-over-year in October, while disposable personal income grew a “healthy” 7 percent. Consequently, “continued consumer resilience” is expected during the holiday season, which began November 1 and continues through the end of December.

The NRF expects record spending during the holiday season and has forecasted retail sales for the period to increase between 3 percent and 4 percent over 2022, consistent with pre-pandemic growth rates.

“The remarkably resilient consumer has been the story of 2023,” Kleinhenz said.

Photo courtesy Zara