Consumers made fewer overall purchases during the third quarter, but spending on goods and services contributed to a “solid,” 2.6-percent annualized improvement in the U.S. GDP. That’s a “much better than expected” result than previously anticipated, according to National Retail Federation (NRF) chief economist Jack Kleinhenz.
Following two consecutive years of year-on-year decline, the turnaround “clearly dispell[s] the notion that the U.S. economy is in a recession and the silver lining was the ongoing resiliency in consumption,” Kleinhenz said.
Recent economic performance including the Thanksgiving week holiday sales period outpaced the first half of the year, which saw declines of 1.6 percent in the first quarter and 6 percent in the second quarter. “A strong labor market, rising wages and access to excess savings built up during the pandemic have given households strong balance sheets that have helped spending continue despite inflation and higher interest rates,” Kleinhenz said.
The news should bode well for retailers heading into what could to be a softer end-of-year, according to Kleinhenz. With the economy cooling, GDP is expected to slow down in Q4—“at best about half of what was recorded in the third quarter,” he added. And with much of their holiday shopping complete, consumers could trim discretionary spending in favor of the high prices that food, gas and mortgages command. But employment numbers are on an upswing and will continue to rise through the fourth quarter and heading into 2023. “There will be economic hardships, and some may feel like they’re in a recession, but for those who have jobs and feel secure about their employment, spending will continue,” Kleinhenz said.
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Job growth has slowed to a pace that isn’t matching labor demand and poses issues for retail and similar sectors. Recent Bureau of Labor Statistics (BLS) data showed that unemployment and job listings have fallen, but retail job listings rose month-on-month from September to October.
Inflation may not play a significant role in curbing consumer spending moving forward, according to Kleinhenz. Consumer Price Index (CPI) data showed that year-over-year inflation dropped from 8.2 percent in September to 7.7 percent in October—the lowest level since January. With hourly earnings growth also slowing to 4.7 percent year over year in October, from 5 percent in September, employers will also feel less pressure to raise prices to mitigate operating expenses.
And despite seeing higher prices at retail, consumer “willingness to spend has been stable,” Kleinhenz said. Retail sales increased 7.5 percent year over year for the first 10 months of 2022, putting the year’s overall sales on track to meet NRF’s forecasts of 6 percent to 8 percent growth over 2021. Holiday sales during November and December are also projected to see similar percentage growth, he added.
Executives are less bullish about the 2023 retail outlook, however. A McKinsey report last week said that 56 percent of industry leaders are bracing for an economic slowdown, and 85 percent believe inflation will remain a core challenge to their businesses in the year ahead.