Higher interest rates dampen US consumer spending: NRF
15 Aug 23 3 min read
Insights
- US consumers are spending more than last year, but at a slower growth rate due to the economy's response to higher interest rates, said NRF's chief economist.
- GDP grew at a 2.4 per cent rate in Q2, up from 2 per cent in Q1 but below 6 per cent in 2021.
- Consumers face financial pressures, shifting from goods to services and relying less on pandemic savings.
Gross domestic product (GDP) grew at a 2.4 per cent annual rate adjusted for inflation in the second quarter. That was up from 2 per cent in the first quarter but in line with 2.1 per cent for all of 2022 and far below the 6 per cent seen in 2021, according to the August issue of NRF’s Monthly Economic Review.
Kleinhenz said: “The economy was clearly more resilient in the first half of this year than many expected, and the consumer environment has been positive as inflation has slowed. Nonetheless, there are ongoing economic challenges and questions, and the pace of consumer spending growth is becoming incrementally slower.
“Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services. While job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available.”
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Consumer spending, which makes up about 70 per cent of GDP, played a major role in the continued expansion. But year-over-year spending growth slipped from 4.2 per cent in the first quarter to 1.6 per cent in the second. Retail sales as calculated by NRF—excluding automobile dealers, gasoline stations and restaurants—were up 3.1 per cent unadjusted year over year in the second quarter. That kept up with inflation but was below the 4 per cent growth for the first six months of the year.
The Personal Consumption Expenditures Price Index—the Federal Reserve’s preferred measure of inflation—was at 3.7 per cent year over year in the second quarter. That was down from 4.9 per cent in the first quarter but still far above the Fed’s target of 2 per cent. The Fed responded by raising rates another quarter-point last month to a range between 5.25 per cent and 5.5 per cent, the highest level since January 2021.
While the Fed still faces “a tricky job” in trying to control inflation without triggering a recession, “the current framework clearly increases the chance of a slower economy,” Kleinhenz said.
The full impact of rising interest on the economy is difficult to predict but revolving credit (mostly credit cards) contracted by nearly $1 billion in June and consumers are less likely to use credit cards to fund purchases as rates rise, added Kleinhenz.
The labour market is also in lower gear. The 185,000 jobs added in June was the lowest number since mid-pandemic in December 2020 and the 187,000 jobs added in July was only slightly better. There were 9.58 million job openings in June, down slightly from 9.62 million in May.
Fibre2Fashion News Desk (NB)
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