The GDP contracted by 1.5% in the first quarter this year, the first quarterly decline since the pandemic-plagued second quarter of 2020.
One of the nation’s leading retail organizations remains confident about the economy.
Although the Federal Reserve faces “a tricky job” in addressing inflation, continuing growth in employment, wages and consumer spending make it unlikely the effort will backfire into a major setback for the economy, according to National Retail Federation chief economist Jack Kleinhenz.
Kleinhenz said given the 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.
“Though many people fear an extreme cooling off of the economy, there is not an overwhelming amount of evidence to support such predictions,” Kleinhenz said. “In general, the data suggests that we remain in an ongoing expansion.”
Kleinhenz’s 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 soaring 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. But Kleinhenz said “there is less reason for concern than the figure suggests.” Consumer spending was up a “solid” 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. Labor Market 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 Employment Cost Index showed wages rising 5% compared with the first quarter of 2021, not high enough to keep up with inflation but the highest reading in nearly two decades.
The Fed increased interest rates by half a percentage point last month, 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.”
The moves have shown signs of easing the public’s concerns. While the rate of inflation expected by consumers in the near term has moved up, expectations for the long term are subdued.