The National Retail Federation’s (NRF) Chief Economist, Jack Kleinhenz, believes its recently-published 2023 retail sales forecast was one of the most difficult written to date.
“The broad economic environment in the United States today is anything but normal,” Kleinhenz said, noting that unemployment is near historic lows and consumers have excess savings even though interest rates are increasing rapidly and with the banking and financial markets unsettled.
“In all my years of forecasting, it has never been so challenging to put together the pieces of the economic puzzle and connect them to where the economy is heading. And the disruption and uncertainty are likely to persist.
“The year ahead will be a bumpy journey. Consumer confidence, especially with banks, needs to be maintained in order to sustain spending in these uncertain times. The wildcard is what the Fed will do with interest rates in the coming months,” said Kleinhenz.
Kleinhenz’s remarks are in the April Issue of NRF’s Monthly Economic Review, which details the reasons behind the organization’s forecast that 2023 retail sales will grow between 4 percent and 6 percent over 2022 for a total of between $5.13 trillion and $5.23 trillion. That would be slower than 2022’s seven percent growth but still above the pre-pandemic average of 3.6 percent. The NRF’s numbers exclude auto dealers, gas stations and restaurants to focus on core retail.
With the Federal Reserve continuing to increase interest rates to fight inflation, Kleinhenz does not expect a recession but said the forecast assumes gross domestic product growth will slow from nearly 3 percent in the second half of 2022 to one percent in 2023. The forecast also assumes the U.S. banking system is “sound and resilient,” as stated by the Fed, with no additional incidents like the collapse of Silicon Valley Bank to cloud consumer confidence.
The five percentage point increase in interest rates imposed by the Fed over the past year is one of the most rapid seen to date and has had an impact on inflation but has not slowed the economy as much as expected, Kleinhenz said. Housing, trade and business investment have been affected, but “consumers have had uncanny staying power” supported by steady job and wage growth, a stockpile of savings built up during the pandemic, access to credit, and lower energy costs.
Combined January and February retail numbers, sales grew 6.6 percent year-over-year, and the economy likely expanded during the first quarter despite higher borrowing costs.
Strong labor and economic activity maintain upward pressure on inflation, but the numbers are falling.
The Personal Consumption Expenditures (PCE) Index, the Fed’s preferred measure of inflation, was up 5 percent year-over-year in February, but that compared with 5.3 percent in the previous two months and a peak of 7 percent last June. Kleinhenz expects inflation will average between 3 percent and 5 percent during 2023.
With pandemic lockdowns over and consumers no longer sequestered at home, inflation is forecasted to be higher for services ranging from eating out to airline travel than retail merchandise, which is reflected in the PCE Index for services, which increased from 5.6 percent in January to 5.7 percent in February while the PCE Index for goods declined from 4.7 percent to 3.6 percent for the same period. Even so, inflation is difficult to measure and forecast, Kleinhenz said.
“I don’t believe the full effect of tightening has shown up,” he said. “Monetary policy works with long and variable lags, and it’s too early to know the true effect of interest rates on the base of the economy,” concluded Kleinhenz.
