Recession or no recession?
The National Retail Federation thinks despite two consecutive quarters of decline, the U.S. economy still does not appear to be in a recession and remains unlikely to enter one this year.
That’s good news for retailers and brands looking to pull off another strong year and holiday, after last year’s spike in sales, though consumers, particularly on the mass level, have been pulling back discretionary spending, as steep inflation pushes prices on gas, food and other essentials sky high.
“Back-to-back contractions have heightened fear of a recession, but while the economy has lost momentum heading into the second half of the year, economic data is not yet consistent with a typical recession,” NRF chief economist Jack Kleinhenz said in a statement Tuesday afternoon. “Our view is that while the economy is functioning at a slower pace it is likely to avoid a recession this year. Despite ongoing uncertainties, we believe the underlying strength of the economy is strong enough to deal with inflation and keep a recession at bay — or short-lived, even if we are wrong.”
Kleinhenz’s remarks came in the August issue of NRF’s Monthly Economic Review, which noted that gross domestic product declined 1.6 percent year-over-year in the first quarter and 0.9 percent in the second quarter. Two consecutive quarters of decline is a common informal indicator of a recession, but the official declaration is up to the National Bureau of Economic Research, which defines a recession as a significant decline spread across the economy. The bureau has yet to rule on whether the current downturn meets that definition. Several factors are involved in determining a recession, including consumer spending, employment levels and industrial production.
“Even with two quarters of GDP decline, private final sales to domestic purchasers — a key measurement of both consumer and business spending — remained in positive territory for the first half of the year, up 3 percent in the first quarter and flat in the second, NRF’s report indicated. Employment, retail sales, income and industrial production have seen slower growth, but none have contracted, according to the NRF.
“A critical indicator that could signal the onset of a recession would be a significant downturn in employment,” Kleinhenz said. But the NRF pointed out that the unemployment rate stood at 3.6 percent in June, nearly half a percentage point lower than the beginning of the year and only slightly above the 50-year pre-pandemic low of 3.5 percent seen in January 2020.
“Meanwhile, payrolls grew at an average monthly rate of 539,000 [people] in the first quarter and 375,000 in the second quarter. And retail sales as defined by NRF — excluding automobile dealers, gasoline stations and restaurants to focus on core retail — were up 7 percent year-over-year in the first six months of the year,” the NRF stated.
Still, as Kleinhenz said, “it is now clear that the world has changed” since the beginning of the year. He cited factors “that could not be anticipated earlier including the persistence of COVID-19, continuing supply chain challenges, the ongoing war in Ukraine and other issues that have driven the highest inflation rates in 40 years.”
With the economy “clearly navigating challenging headwinds that leave us far from a safe port,” NRF has “adjusted several levers” that affect its economic outlook, Kleinhenz said, indicating that the retail trade organization now expects GDP to grow 2 percent this year rather than the previous projection of 3.5 percent. “Growth of the Personal Consumption Expenditures Price Index — the Federal Reserve’s favored measure of inflation — is now expected to average 6.2 percent for 2022, two percentage points higher than assumed earlier.”
In addition, the NRF said the savings rate is expected to fall “as consumers dip into their pandemic-era savings to pay for high food and energy costs as well as discretionary spending for travel and entertainment.”
NRF is sticking with its projection that 2022 retail sales will grow between 6 and 8 percent over 2021.
“At this juncture, the key concern remains inflation and the Fed’s policy moves to contain it,” Kleinhenz said. “As the central bank attempts to adjust monetary policy, it faces the dangers of continued inflation if it doesn’t do enough and a recession if it goes too far. Consumer reaction to interest rate hikes is hardly immediate or predictable, making it impossible to judge the effect of the Fed’s reactions in real time and quickly correct any oversteering.”