NRF: Economy strong enough to ‘keep a recession at bay’

A leading retail association has reaffirmed its confidence in the U.S. economy.

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, National Retail Federation chief economist Jack Kleinhenz said on Tuesday.

Kleinhenz noted that while back-to-back contractions have heightened fear of a recession and the economy has lost momentum heading into the second half of the year, economic data is not yet consistent with a typical recession.

“Our view is that while the economy is functioning at a slower pace it is likely to avoid a recession this year,” he said. “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% year over year in the first quarter and 0.9% 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 not yet ruled on whether the current downturn meets that definition.

A critical indicator that could signal the onset of a recession would be a significant downturn in employment, Kleinhenz said. But the unemployment rate stood at 3.6% 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% seen in January 2020.

Meanwhile, payrolls grew at an average monthly rate of 539,000 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% year over year in the first six months of the year.

Even though economic indicators remain strong, Kleinhenz said “it is now clear that the world has changed” since the beginning of the year, citing 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.

NRF still continues to expect that 2022 retail sales will grow between 6% and 8% 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.”