Consumers may worry about high inflation and interest rate hikes initiated by the United States Federal Reserve intended to bring inflation under control, but that hasn’t stopped them from spending, according to National Retail Federation Chief Economist Jack Kleinhenz.
In the October issue of NRF’s Monthly Economic Review, Kleinhenz stated consumer spending held up better than expected in August as overall retail sales as reported by the U.S. Census Bureau gained 0.3% from July and 9.1% year over year. Year-over-year retail sales advances have been mostly in the upper single digits since spring, which Kleinhenz characterized as healthy, if not as dramatic as the double-digit numbers seen most of last year into early 2022.
The Fed kept interest rates low for the past two years to counter the impact of the pandemic, then it hiked rates three-quarters of a percentage point in September. The Fed rate now is between 3% and 3.25%. The central bank plans to continue increasing rates until inflation, which was at 8.3% in August, cools to about 2%.
Higher interest rates have driven up the cost of credit card debt, financing large purchases and mortgages. The economic uncertainty had driven consumer confidence down, although that has lately rebounded. According to an August survey by the Federal Reserve Bank of New York, consumers are becoming more optimistic, expecting inflation to be at only 5.7% a year from now, down from 6.2% expected a month earlier. Consumers expect an inflation fall to 2.8% three years from now rather than their earlier expectation of a drop to 3.2%.
Gross domestic product declined 1.6% year over year in the first quarter and 0.6% in the second quarter, prompting concerns as two consecutive quarterly declines in GDP, while not the official definition, typically mark a recession, Kleinhenz noted. The Blue Chip Economic Indicators panel of business economists, which includes Kleinhenz, is expecting 1.2% GDP growth in the just-ended third quarter and 0.6% in the fourth quarter continuing into 2023. Only 38% of Blue Chip economists now believe the Fed will rein in inflation without triggering a recession, down from 51% in August, but 95% say a recession would likely be mild. The panel sees a 42% chance of a recession beginning this year and a 54% chance of one beginning in 2023.
“The economic situation in the United States is unsettling,” Kleinhenz said. “Consumer confidence is down, consumer spending’s rate of growth has slowed, and economists and consumers alike are worried about the possibility of a recession, all reflecting persistently high inflation and rising interest rates. Nonetheless, spending continues to grow, and many economists say a recession, if there is one, will likely be mild. Consumers have become cautious, but they have not stopped spending. Growth is not as high as last year, but households continue to spend each month as more jobs, wage growth and savings backstop their finances and help them confront higher prices.”