Confusion, anxiety move to center stage in economy, says NRF chief economist
Halfway through the year, it is still difficult to predict the impact new tariffs and other government policies will have on the U.S. economy.
While economic fundamentals appear solid at this juncture, uncertainty is pervasive, according to National Retail Federation chief economist Jack Kleinhenz. (Although uncertainty is difficult to quantify, the Economic Policy Uncertainty Index developed by economists at Stanford and Northwestern has fallen by half since April, when it hit its highest level since the pandemic.)
The year began with high expectations for the strength of the U.S. economy, noted Kleinhenz, pointing to strong 2.8% year-over-year growth in gross domestic product in 2024 that was led by consumer spending and helped by business and government spending. Since then, he said, anxiety and confusion have taken center stage in the economy and financial markets as uncertainty over public policy has intensified.
“It was difficult to judge how policy changes would impact the economy in early 2025 and it remains so now, said Kleinhenz. "There are many crosscurrents surrounding tariffs, immigration and deregulation, and everyone is sorting through what the tariff rates are going to be, how they will impact inflation for retail products and, importantly, how long they will be in place.”
Kleinhenz’s comments came in the July edition of NRF’s Monthly Economic Review, which said “economic growth is holding up relatively well” so far this year despite uncertainty about the future.
GDP fell at an annual rate of 0.5% in the first quarter, but that was mostly because of a surge in imports driven by tariff announcements. In contrast, private final sales to domestic purchasers — a measure of consumer and business spending — were up 1.9% year over year. That was down from 2.9% in the previous quarter but showed continued strength in private sector demand and that “the slowdown has been less than feared.”
Inflation
Year-over-year inflation as measured by the Personal Consumption Expenditures Price Index ticked up to 2.3% in May from 2.1% in April. Unadjusted for inflation, personal income and consumer spending were both up 4.5% in May. Also, core retail sales as defined by NRF — based on Census Bureau data but excluding automobile dealers, gasoline stations and restaurants — rose 3.9% year over year both in May and for the first five months of the year.
The labor market is performing better than expected, with employers adding 147,000 jobs in June, just above the monthly average of 146,000 over the past year, and the unemployment rate was largely steady at 4.1%. Job openings rebounded to 7.8 million in June, “indicating continued demand for workers” and exceeding the 7 million people unemployed.
Tariffs have yet to be clearly seen in prices. But if the large increases in tariffs announced earlier this year take effect and are sustained, they will infiltrate consumer prices, causing a downshift in spending that is likely to spill over into the labor market later in the year with higher unemployment, according to Kleinhenz.
Kleinhenz said the Federal Reserve is “quite unlikely” to cut interest rates this month but could be on track to do so this fall. In the meantime, Fed officials are closely watching the “inflation psychology” of consumers — how their expectations about future inflation influence their current spending and savings decisions and whether they are influenced by short-term price increases.
With the One Big Beautiful Bill Act spending measure signed into law, there are ”many moving parts” that “could greatly alter the economic outlook” depending on how businesses and consumers react, Kleinhenz said. Nonetheless, adoption of the bill — which provides business incentives, permanent tax cuts for individuals and measures to induce more workforce participation — “meaningfully reduces fiscal policy uncertainty,” he said.
