According to National Retail Federation chief economist Jack Kleinhenz, the United States Federal Reserve faces “a tricky job” in addressing inflation, but ongoing growth in employment, wages and consumer spending make it unlikely the effort will generate a major setback for the economy.
However, the NRF also has said that the U.S. Environmental Protection Agency may be prompting inflation one quarter.
In the June issue of NRF’s Monthly Economic Review — which stated that the latest Blue Chip Economic Indicators survey of economists projects a gross domestic product gain of 2.6% this year and another 2.1% in 2023 — Kleinhenz maintained that, after soaring 5.7% in 2021, GDP contracted by 1.5% in the first quarter this year, the first quarterly decline since the pandemic-plagued second quarter of 2020. But he added, “there is less reason for concern than the figure suggests.”
The GDP drop, Kleinhenz indicated, had to do with international trade balances, inventories and government spending and occurred as consumer spending gained a “solid” 3.1% year-over-year with business investment was up 9.2%
April retail sales as calculated by NRF, with automobile dealers, gasoline stations and restaurants excluded, advanced 0.9% seasonally adjusted from March and 6.4% year over year. On a three-month moving average, April sales increased 7.1% year over year.
Kleinhenz noted that the labor market is a key driver of consumer spending and that the 428,000 jobs added in April topped the 400,000 mark for the 12th month in a row. Unemployment was 3.6%, up only slightly above the 50-year low of 3.5% that occurred in February 2020 and before the pandemic shut down much of the U.S. economy. The Employment Cost Index showed wages rising 5% the first quarter of 2021, not high enough to keep up with inflation but the highest reading in almost two decades.
Consumer spending, Kleinhenz added, has been shifting from the pandemic-era focus on goods toward services as people re-engage in activities they had avoided. Data from S&P Global Economics demonstrates that out-of-the-house mobility in retail and recreation was only 11% below the pre-pandemic trend as of mid-April and other measures such as the number of diners at restaurants, air traffic and hotel occupancy were close to 2019 rates.
The Fed increased interest rates by half a percentage point in May, following a quarter-point increase in March, and said it is paring its holdings of Treasury bills, bonds, notes and other government securities, all in an attempt to tighten monetary policy and slow inflation.
“With changes underway that focus on taming inflation without splintering the economy, the nation’s economic system is in the process of being rebalanced in ways that are testing its resilience,” Kleinhenz said. “This is an extraordinary period with unprecedented factors that include inflation at a 40-year high, uncertainty over the war in Ukraine, supply chain disruptions and the Federal Reserve raising interest rates. There’s good reason why businesses, consumers and policymakers alike all feel uneasy.”
Still, he asserted, “Though many people fear an extreme cooling off of the economy, there is not an overwhelming amount of evidence to support such predictions. In general, the data suggests that we remain in an ongoing expansion.”
In a separate assessment, the NRF insisted that biodiesel levels set by the U.S. Environmental Protection Agency for this year are too high and will drive up inflation for already higher food prices, especially in processed foods that rely on food oils from crops such as soybeans. The EPA set the Renewable Fuel Standard program’s biodiesel blending mandate for 2022 at 5.63 billion gallons, a 22% increase over 2020. The increase came after NRF asked the EPA in February to keep the biodiesel mandate at 2020’s 4.63 billion gallons temporarily and allow supplies of the oils to catch up with demand, citing the Clean Air Act, which requires the agency to consider commodity and food prices when setting RFS levels.
“For more than a year, we’ve alerted the EPA and the administration about the shortage of food oils, which is causing significant disruptions throughout the supply chain and raising food costs for consumers,” said David French, NRF’s senior vp for government relations and executive director of the federation’s National Council of Chain Restaurants division. “Food manufacturers simply can’t get their hands on enough of these oils to make everyday foods from bread and buns to condiments and dressings, and the problem is even worse for small and medium-size manufacturers.”
