In association with the February issue release of NRF’s Monthly Economic Review, National Retail Federation chief economist Jack Kleinhenz maintained that a recession is unlikely in the immediate future and the United States economy should see slight growth in 2023 as consumers continue to cope with inflation and high interest rates.
After two consecutive quarters of negative numbers in the 2022 first half, a common but unofficial definition of a recession, gross domestic product grew 3.2% year-over-year in the third quarter. Growth slowed to 2.9% in the fourth quarter, but the year still came in at 2.1% ahead of 2021. NRF pointed out that the U.S. National Bureau of Economic Research declined to declare an official recession because the decline in 2022’s first half affected only certain business sectors rather than meeting its definition of a recession being a significant decline seen across the economy.
Consumer spending grew 2.8% for the year, but it slowed in late 2022, dropping 0.2% month over month in November and another 0.3% in December. Overall retail sales slipped 1.1% monthly in December as gasoline prices and automobile sales fell sharply, and holiday sales were uneven. Retail sales as defined by NRF, excluding auto dealers, gas stations and restaurants, declined 0.5% month over month in December. Combined November-December holiday sales gained 5.3% over 2021 but were slower than expected.
With spending slowing, the Personal Consumption Expenditure Index, the U.S. Federal Reserve’s preferred measure of inflation, eased to 5% in December, its slowest annual pace in over a year and down from 5.5% in November. The core PCE index, which excludes volatile food and energy prices, was at 4.4%, NRF noted. After the inflation numbers appeared, the Fed chose to increase interest rates by only a quarter percentage point at its February meeting today versus the half-point increase imposed in December.
Although the labor market is cooling as some major sectors, particularly in technology, small businesses continue to hire and the December unemployment rate was at a 50-year low of 3.5%.
Whether the U.S. will see a “sluggish pace of growth” or a “considerable falloff” depends largely on whether the Fed can manage interest rates to ease inflation without stalling the economy, Kleinhenz said. A slowing rate of inflation could prompt reassessment of future rate hikes or even a reduction in rates. However, he observed that rates will likely remain “in restrictive territory” for the remainder of the year.
“A month into 2023, the economy is facing stiff headwinds and – with the exception of easing inflation – will likely face more challenges before it gets better,” Kleinhenz said. “The debate on whether we are in a recession will heighten over the next few months, just like last year. But while households will probably feel recession-like conditions this year, I do not expect that the downturn will be severe enough to become an official recession.”
That being said, Kleinhenz added that corporate and household balance sheets are in the best shape we’ve seen going into a downturn.
“This should make any economic slowdown mild and limit the downside risks despite my outlook for the economy to straddle a zero-growth path during 2023.”
