Economy Slowing But Recession Unlikely, NRF Says

With the first month of 2023 already in the rearview mirror, the National Retail Federation’s (NRF) top economist is predicting slight economic growth this year and feels the prospects of a recession are less likely.

“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,” said Jack Kleinhenz, chief economist with the NRF. “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.”

He noted the corporate and household balance sheets are in the best shape we’ve seen going into a downturn, making any economic slowdown mild and limiting the downside risks despite his outlook for the economy to straddle a zero-growth path during 2023.

Kleinhenz’s remarks came in the February issue of NRF’s Monthly Economic Review, which said the economy is “more resilient than expected” but nonetheless showing a mild slowdown as Federal Reserve interest rate hikes adopted to bring inflation under control “are having their desired effect.”

Following two consecutive quarters of negative numbers in the first half of the year – 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% above 2021. 

The National Bureau of Economic Research declined to declare an official recession because the decline in the first half of the year affected only certain sectors of the economy rather than meeting its definition of a recession being a significant decline seen across the economy.

While consumer spending grew 2.8% for the year, it was slowing in late 2022, dropping 0.2% month over month in November and another 0.3% in December. Overall retail sales dropped 1.1% monthly in December as gasoline prices and automobile sales fell and holiday sales were choppy. 

Retail sales as defined by NRF – excluding auto dealers, gas stations and restaurants to focus on core retail – were down 0.5% month over month in December. Combined November-December holiday sales were up 5.3% over 2021 but were slower than expected.

With spending slowing, the Personal Consumption Expenditure Index – the Fed’s preferred measure of inflation – eased to 5% in December, its slowest annual pace in over a year. That was down from 5.5% in November and the core PCE index, which excludes volatile food and energy prices, was at 4.4%. Following those results, the Fed increased interest rates by only a quarter of a percentage point at its February meeting rather than repeating the half-point increase imposed in December.

The labor market is cooling as some major companies, particularly in technology, announce layoffs, but small businesses are continuing to hire and the December unemployment rate was at a 50-year low of 3.5%.