As part of the organization’s Monthly Economic Review, National Retail Federation chief economist Jack Kleinhenz stated that the United States economy did better in the first half of 2023 than early indicators suggested and appears to be “rolling forward” even as the rate of growth looks like it will slow through the remainder of 2023.
Kleinhenz cited revised data from the U.S. Bureau of Economic Analysis that now show first-quarter gross domestic product grew 2% year over year adjusted for inflation rather than the 1.1% first reported. The personal savings rate has been revised upward to 4.3% from 3.4% and private final sales to domestic purchasers, which exclude inventories and imports to provide a good indicator of underlying growth, were revised to 3.2% growth from 2.9%.
Consumer spending, 70% of GDP, increased at an annual rate of 4.2% in the first quarter, which was four times the 1% growth in the final quarter of 2022 and the fastest growth since mid-2021 despite strong headwinds from interest rates and inflation.
Unadjusted household spending gained just 0.1% month over month in May versus 0.6% in April, indicating that a slowdown can be expected when second-quarter results are released. Spending is slowly shifting from goods, which declined 0.5% in May, to services, which grew 0.4%, Kleinhenz pointed out Retail sales as defined by NRF – which excludes automobile dealers, gasoline stations and restaurants to focus on core retail – were up 0.4% month over month in May but less than the 0.6% growth in April.
The U.S. Federal Reserve’s Open Market Committee last month left interest rates unchanged after raising them for 10 months, saying the pause would provide time to assess the effect of the increases already set. Still, the majority of the committee members said they expected two more rate increases in the coming months, with others predicting anywhere from one to four hikes. Only two of the 11 members said they expected rates to stay the same.
Inflation remains elevated but it is easing and taking pressure off of households. The Personal Consumption Expenditures Price Index, the Fed’s preferred measure of inflation, showed prices were up 3.8% year over year in May. That was down from 4.3% in April and the first time inflation came in under 4% since early 2021. PCE inflation peaked at almost 7% in mid-2022. Despite the reduction, continued consumer spending increases could prompt the Fed to further increase interest rates as it tries to slow inflation to its 2% target.
“The first half of the year is over and the economy is still moving in the right direction,” Kleinhenz said in detailing the economic results. “While its rhythm, tone and pattern have slowed, it has not stalled and recently revised data shows underlying strength that seems to be rolling forward. The resiliency of the U.S. consumer will be tested in the coming months as economic headwinds are likely to impair spending.”
Yet, $500 billion in excess savings built up during the pandemic and continued employment growth mean consumers are “the path of least resistance to economic growth and are doing their part to keep the economy moving ahead,” Kleinhenz said.
