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NRF’s Chief Economist Watching Inflation Trends and Recession Risks

While retail price increases have started to stabilize, the economic outlook for 2023 remains hazy.

“This year starts with the possibility of easing inflation but also uncertainty as the Federal Reserve’s ongoing interest rate hikes continue to increase the risk of a recession,” National Retail Federation (NRF) chief economist Jack Kleinhenz said.

Data shows inflation cooling over the past five months. In November, Consumer Price Index (CPI) data showed inflation up 7.1 percent year-over-year, down from 7.7 percent in October and lower than its peak of 9.1 percent in June. Though it appears to be trending down, inflation is “not going away” as it still hovers at 6 percent, Kleinhenz said.

Prices continue to rise in areas like rent and recreation, and Kleinhenz expects those conditions will persist. The Federal Reserve responded to the issue by raising its benchmark interest rate 0.5 percent in December to the highest level in 15 years—an attempt at “forceful action” against inflation, according to Fed chairman Jerome Powell, after several 0.75-percent increases. This immediately affected the residential and commercial real estate industry. Homebuilding was down 26.4 percent year over year in the third quarter of 2022—its largest decline since the pandemic began. Meanwhile, spending on business construction declined 6.9 percent year over year—an improvement from the 12.7 percent decline the previous quarter, but below 2021 spending due to higher financing costs and economic concerns.

For now, consumers “are still out spending as the economy grows and households remain confident about their future,” Kleinhenz said, though “keeping a critical eye on the composition of spending is required.”

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“How will the rotation from spending on goods to spending on services impact wage developments in the labor market since services are principally driven by wages?” he added.

 It’s “impossible” to predict whether the Fed’s actions will trigger a recession, but raising interest rates increases the odds. The six to 18-month lag between policy decisions and impact means actions are typically taken as “a judgement call on where the economy is heading,” he pointed out.

It’s also unclear how a recession will impact economic activity, Kleinhenz said, with trade, labor, energy markets and other financial conditions all playing a role in the severity and duration of a potential downturn. The question is whether the U.S. economy is resilient enough to bounce back, or even “sidestep” a recession, he said. The labor market and the consumer will be the primary forces molding the economic outlook this year, he added.

November data from the U.S. Bureau of Economic Analysis (BEA) showed that personal income increased $80.1 billion (0.4 percent), with disposable personal income increasing by $68.6 percent (0.4 percent). Increases in income resulted primarily from wage and salary bumps in both service- and goods-producing industries. Meanwhile, consumers increased personal consumption expenditures (PCE), or the total value of goods and services bought, by $19.8 billion (0.1 percent).

Holiday performance may provide an early indicator of shoppers’ attitudes and appetites heading into 2023. “The rhythm of holiday sales continued at a healthy pace in 2022, showing that while consumers don’t like higher prices, they are able and willing to pay them,” Kleinhenz said. Even with inflation rising throughout the summer and remaining above 7 percent in the fall, retail sales still grew 7.2 percent for the first 11 months of the year. “Spending remains elevated largely because jobs remain plentiful and unemployment risks appear low, but its future will likely be linked to job security,” he added. “If inflation comes down before the labor market cools, consumer spending should remain strong and keep the economy from contracting, giving us the ‘soft landing’ the Fed is seeking.”

Mastercard SpendingPulse’s post-holiday data showed that U.S. retail sales online and in stores jumped 7.6 percent year-over-year from Nov. 1-Dec. 24.

“This holiday retail season looked different than years past,” said Steve Sadove, senior advisor for Mastercard and former CEO and chairman of Saks Incorporated. “Retailers discounted heavily but consumers diversified their holiday spending to accommodate rising prices and an appetite for experiences and festive gatherings post-pandemic.”

Online sales grew 10.6 percent from the same period in 2021, according to Mastercard’s preliminary insights. Overall, e-commerce accounted for 21.6 percent of all retail sales, up from 20.9 percent in 2021 and 20.6 percent in 2020, which Sadove attributed to convenience and discounts. Brick-and-mortar sales also increased by 6.8 percent.

Much of that traffic occurred on the season’s winningest sales holiday. Black Friday remained the top spending day of the 2022 holiday season, up 12 percent from the year prior. Notably, while sales of electronics and jewelry fell by over 5 percent year on year, apparel sales rose 4.4 percent.

“Inflation altered the way U.S. consumers approached their holiday shopping—from hunting for the best deals to making trade-offs that stretched gift-giving budgets,” according to Michelle Meyer, Mastercard Economics Institute North America chief economist. “Consumers and retailers navigated the season well, displaying resilience amid increasing economic pressures.”