Consumer spending growth is slowing as the economy settles down amid higher interest rates intended to reduce inflation, National Retail Federation chief economist Jack Kleinhenz noted in the August NRF Monthly Economic Review.
The second quarter Personal Consumption Expenditures Price Index, the inflation measure the United States Federal Reserve prefers, was at 3.7% year over year, down from 4.9% in the first quarter but still above the Fed’s target of 2%, Kleinhenz said. The Federal Reserve responded by raising base interest rates another quarter point in July to a range between 5.25% and 5.5%, the highest level since January 2021.
Although the Fed still faces “a tricky job” in trying to control inflation without triggering a recession, “the current framework clearly increases the chance of a slower economy,” Kleinhenz said.
The full impact of rising interest rates on the economy is difficult to predict but revolving credit, a measure mostly consisting of credit cards, contracted by nearly $1 billion in June. At this point, consumers seem less likely to use credit cards to fund purchases given rising interest rates, Kleinhenz said.
The labor market is also in lower gear. The 185,000 jobs added in June was the lowest number since the depths of the COVID-19 pandemic in December 2020 and the 187,000 jobs added in July was only slightly more. There were 9.58 million job openings in June, down from 9.62 million in May, Kleinhenz maintained.
“The economy was clearly more resilient in the first half of this year than many expected, and the consumer environment has been positive as inflation has slowed,” Kleinhenz said. “Nonetheless, there are ongoing economic challenges and questions, and the pace of consumer spending growth is becoming incrementally slower. Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services. While job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available.”
