NRF: With no sign of recession, labor market, interest rates key to economy in 2024

Consumer spending will continue to grow in 2024, but at a rate slightly below overall GDP growth.

That’s the view of National Retail Federation (NRF) chief economist Jack Kleinhenz, who said what happens with the economy in 2024 could depend largely on the labor market and what the Federal Reserve does with interest rates.

“Consumers were in decent shape heading into the holiday season, but the labor markets, while unlikely to unravel, do look likely to cool, which would impact consumer expectations and, in turn, affect spending decisions,” he said.

According to Kleinhenz, Federal Reserve officials have tough policy choices ahead as they decide on what to do — and when.

 “There is still a risk that keeping rates too high could curb the economy’s momentum more than necessary,” he explained. “Yet if they lower rates too soon, it could allow the economy to re-inflate and make it harder to contain inflation pressures.”

Kleinhenz’s comments came in the February issue of NRF’s Monthly Economic Review, which said the economy “has been more resilient than expected” and shows “no sign of a recession,” citing the 3.3% annual growth in gross domestic product for the fourth quarter and 2.5% for the year. 

Disposable personal income was up 6.9% year-over-year in December and retail sales as defined by NRF – excluding automobiles, gasoline stations and restaurants to focus on core retail – were up 3.3%. November-December holiday sales rose 3.8% over 2022, easily meeting NRF’s forecast for 3-4% growth.

The Personal Consumption Expenditures Price Index – the Fed’s preferred measure of inflation – was at 2.6% year over year in December, down “meaningfully” from 5.5% at the beginning of the year. January retail sales haven’t been reported yet, but consumer sentiment was at its highest level in nearly three years as shoppers appeared to be more upbeat about the economy, income and employment.

Kleinhenz said part of the recent pace of economic growth and lower inflation may be explained by a sharp acceleration in productivity. Non-farm productivity, which measures hourly output by worker, increased at an annual rate of 5.2% in the third quarter, its fastest growth in three years. Gains in productivity help mitigate inflation fueled by supply issues in particular because producing more goods and services in a shorter time reduces unit costs and raises supply.

While the Fed left interest rates unchanged this week, the central bank has said consistent and cumulative evidence of inflation easing is necessary before rate cuts will be considered.

“Weaker job and wage growth would provide part of that evidence and support shifting toward rate cuts to support the economy,” Kleinhenz said. “On the other hand, if hiring slows too much it could challenge the economy and strain many households further given how long they have been dealing with high inflation. Striking the right balance remains the challenge.”