The National Retail Federation Chief Economist, Jack Kleinhenz, believes a recession is unlikely in 2023, and the economy should see slight growth for the year as consumers continue to manage through inflation and high interest rates.
“A month into 2023, the economy is facing stiff headwinds and, except easing inflation, will likely face more challenges before it gets better,” Kleinhenz said in an NRF release. “The debate on whether we are in a recession will heighten over the next few months, just like last year. But while households will probably feel recession-like conditions this year, I do not expect that the downturn will be severe enough to become an official recession.”
Kleinhenz said the good news is that corporate and household balance sheets are in the best shape going into a downturn. He believes it should make an economic slowdown mild and limit the downside risks despite his outlook for the economy to deliver zero growth during 2023.
The economist’s remarks came in the February issue of NRF’s Monthly Economic Review, which said the economy is “more resilient than expected” but showing a mild slowdown as Federal Reserve interest rate hikes adopted to bring inflation under control “are having their desired effect.”
Following two consecutive quarters of negative numbers in the first half of the year, a common but unofficial definition of a recession, gross domestic product grew 3.2 percent year-over-year in the third quarter. Growth slowed to 2.9 percent in the fourth quarter, but the year remained at 2.1 percent above 2021. The National Bureau of Economic Research declined to declare an official recession because the decline in the first half of the year affected only specific sectors of the economy rather than meeting its definition of a recession having a significant decline seen across the economy.
While consumer spending grew 2.8 percent for the year, it slowed in late 2022, dropping 0.2 percent month over month in November and another 0.3 percent in December.
Overall retail sales dropped 1.1 percent monthly in December as gas prices and auto sales fell sharply, and holiday sales were choppy. Retail sales as defined by NRF, excluding auto dealers, gas stations and restaurants to focus on core retail, were down 0.5 percent month over month in December. Combined November/December holiday sales were up 5.3 percent over 2021 but were slower than expected.
With spending slowing, the Personal Consumption Expenditure Index, the Fed’s preferred measure of inflation, eased to 5 percent in December, its slowest annual pace in over a year. That was down from 5.5 percent in November, and the core PCE index, which excludes food and energy prices, was at 4.4 percent. Following those results, the Federal Reserve increased interest rates by a quarter of a percentage point at its February meeting today rather than repeating the half-point increase imposed in December.
The labor market has cooled as some of the major companies, particularly in technology, announced layoffs, but small businesses continue to hire, and the December unemployment rate was at a 50-year low of 3.5 percent.
Kleinhenz said that whether the economy will see a “sluggish pace of growth” or slip into a “considerable falloff” depends on whether the Fed can strike the right balance between interest rates and inflation. While the slowing momentum of inflation could pave the way for a reassessment of future rate hikes or a reduction in rates, Kleinhenz said that rates would likely remain “in restrictive territory” for the remainder of the year.
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