NRF: Economy Being Rebalanced But Extreme Cooling Off Unlikely

Strong employment levels and consumer spending cited as key factors expected to keep the economy growing.
Greg Sleter
Associate Publisher/Executive Editor
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As the Federal Reserve takes steps to deal with the issue of on-going inflation, the chief economist with the National Retail Federation (NRF) said continued growth in employment and consumer spending make it “unlikely” that the Fed’s effort will have a negative impact on the economy.

“With changes underway that focus on taming inflation without splintering the economy, the nation’s economic system is in the process of being rebalanced in ways that are testing its resilience,” said Jack Kleinhenz, chief economist with the NRF. “This is an extraordinary period with unprecedented factors that include inflation at a 40-year high, uncertainty over the war in Ukraine, supply chain disruptions and the Federal Reserve raising interest rates. There’s good reasons why businesses, consumers and policymakers alike all feel uneasy.”

Kleinhenz noted that while there is a concern over an extreme “cooling off” of the economy, there is not an overwhelming amount of evidence that supports such predictions. Overall, he said, the data suggests the economy will continue to grow. 

His remarks came in the June issue of NRF’s Monthly Economic Review, which noted that the latest Blue Chip Economic Indicators survey of economists projects that gross domestic product will climb 2.6% this year and another 2.1% in 2023.

After growing 5.7% in 2021, GDP contracted by 1.5% in the first quarter this year, the first quarterly decline since the pandemic-plagued second quarter of 2020. However, consumer spending was up 3.1% year-over-year while business investment was up 9.2%, with the GDP drop tied to international trade balances, inventories and government spending.

The labor market is a key driver of consumer spending, and 428,000 jobs were added in April, topping the 400,000 mark for the 12th month in a row. Unemployment was 3.6%, only slightly above the 50-year low of 3.5% in February 2020 just before the pandemic shut down much of the economy.

The Fed increased interest rates by half a percentage point in May, following a quarter-point increase in March, and said it is paring its holdings of Treasury bills, bonds, notes and other government securities, all in an attempt to tighten monetary policy and slow inflation.

“The Fed has a tricky job on its hands,” Kleinhenz said. “Increased interest rates will mean higher borrowing costs across the economy at the same time higher prices keep eroding the purchasing power of the U.S. consumer. But the central bank needs to act in order to prevent inflation from being baked into the economy and to reduce the risk that expectations of inflation will become unanchored.