After a better-than-expected performance in 2023, what happens with the economy in 2024 could depend largely on the labor market and what the Federal Reserve does with interest rates, according to National Retail Federation (NRF) chief economist Jack Kleinhenz.
“Federal Reserve officials have tough policy choices ahead as they decide on what to do and when,” Kleinhenz says. “There is still a risk that keeping rates too high could curb the economy’s momentum more than necessary. Yet if they lower rates too soon, it could allow the economy to re-inflate and make it harder to contain inflation pressures.”
“I remain of the view that consumer spending will continue to grow, but at a rate slightly below overall GDP growth,” Kleinhenz adds. “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.”
Key takeaways:
- 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 Q4 2023 and 2.5% for the year. Disposable personal income was up 6.9% year-over-year in December 2023 and retail sales were up 3.3%. November-December holiday sales were up 3.8% over 2022, easily meeting NRF’s forecast for 3-4% growth.
- 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.
- The Bureau of Labor Statistics introduced experimental measurements of retail output and labor productivity intended to provide a fuller understanding of the industry given significant changes such as many retailers developing their own e-commerce platforms, fulfillment centers and distribution networks. Gains in productivity have been uneven, however, with clothing stores increasing sales per hour of labor dramatically while grocers have seen only small increases.
- 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 says. “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.”
