Consumer spending might not sustain the economic growth seen recently in the United States, according to an analysis by the National Retail Federation.
NRF Chief Economist Jack Kleinhenz, commenting as part of the organization’s Monthly Economic Review, said while consumers spent more than expected amid high inflation and high interest rates during 2023, spending growth is likely to slow in 2024.
“The 2023 U.S. economy was marked in large measure by the impressive resiliency of the consumer,” Kleinhenz stated. “A year ago, many commentators were skeptical and calling for a recession, but the recession never came. With each passing month, consumers kept spending despite inflation and higher borrowing costs. Nonetheless, those tailwinds are not necessarily sustainable. Tighter credit conditions along with higher borrowing costs continue to be in place now that we’ve turned the page on the annual calendar, and employment reports confirm that the labor market expansion is slowing.”
Kleinhenz noted consumer spending got support from a tight labor market and a “wealth effect” from a rise in equity and home prices, as well as savings built up during the pandemic. Despite some economic pessimism, inflation-adjusted gross domestic product managed 2.3% growth over 2022. December’s unemployment rate of 3.7% was among the lowest seen in decades, and the 4.5% year-over-year increase in wages outstripped the year-end 2.6% rate of inflation as measured by the Personal Consumption Expenditures Price Index, which is a preferred statistic among United States Federal Reserve officials.
Unadjusted for inflation, consumer spending gained 5.2% year over year in October and November, boosted by a 7% increase in disposable personal income versus the annum earlier. Core retail sales – excluding automobile dealers, gasoline stations and restaurants – advanced 3.7% year over year for the first 11 months of 2023.
Still, job openings fell to 8.79 million in November, the lowest level since March 2021. Although the Labor Department reported nonfarm payroll growth of 216,000 jobs in December, the net growth in private-sector jobs was only 68,000 after accounting for a downward revision to the previous months’ job growth.
In addition, NRF cited recent surveys indicating consumer worries about factors such as prospects regarding income, business and job market conditions given high interest rates, ongoing inflation and political stress. Those concerns aren’t new, NRF noted. A critical question hanging over the outlook is what the Fed will do with interest rates, which it has raised to curb inflation, in part by cooling off the hot jobs market.
NRF pointed to central bank suggestions that rate hikes are likely over and that it could cut the benchmark federal funds rate, currently 5.25-5.5% , to 4.6% by year’s end.
Of course, consumer response to those cuts will be another factor that will influence the economy in 2024, as will be business willingness to take on debt at rates some might consider prohibitive.
Kleinhenz commented, “The labor market looks set to cool further this year, which will impact consumer expectations for employment and wage growth, and, in turn, affect spending decisions. Spending is elevated relative to current income, and maintaining the recent pace of growth will be increasingly difficult.”
