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Retail Strong, But for How Long?

The National Retail Federation’s latest economic forecast is one of the most optimistic we’ve heard recently – but should be read with a few caveats because of its timing.

Retail sales are of course the great engine of growth for the nation’s economy. Prospects for the near future look good, according to NRF’s May monthly economic review and its assumption that strong retail sales will continue.

The U.S. Census Bureau said overall retail sales in April were up 0.9% seasonally adjusted from March and up 8.2% year over year. That compared with increases of 1.4% month over month and 7.3% year over year in March.

NRF’s retail sales calculation, which excludes automobile dealers, gasoline stations and restaurants, showed April was up 0.9% seasonally adjusted from March and up 6.4% unadjusted year over year. In March, sales were up 1% month over month and up 3.9% year over year.

In his forecast published in May, NRF Chief Economist Jack Kleinhenz believed the Federal Reserve can succeed in reducing inflationary pressures by raising interest rates.

“The economy’s fast-paced growth could slow somewhat as the Federal Reserve tries to bring inflation under control in the next few months, but consumers are likely to keep on shopping as lower inflation eases uncertainty,” he said.

Keep in mind that Kleinhenz’s comments on April sales and NRF’s May economic review came out just before Target, Walmart, Costco, Dollar General and Dollar Tree reported disappointing results, sending the stock market into a downward spiral.

“There is a growing list of uncertainties, and the risks are mounting,” he admitted at that time. “But underlying strength and momentum from both the consumer and business sectors are likely to offset a modest slowdown and should leave the economy bustling forward this year.”

Looser fiscal and monetary policies exercised by the Fed that have combined with ongoing pandemic-induced supply chain issues to drive inflation are now coming to an end, Kleinhenz said.

The “first whiff” of current inflation came in April 2021, when the Bureau of Economic Analysis’ Personal Consumption Expenditures (PCE) Index – the Fed’s preferred measure of consumer inflation – jumped 3.6% over the year before, he added.

That was double the rate at the beginning of 2021 and the highest in 13 years. PCE inflation was 6.6% in March, the highest in decades, and the Fed now expects it to end 2022 at 4.3% even as this year’s numbers lap last year’s growth.

The Fed is working on two fronts to slow inflation. First, it is ratcheting up interest rates. NRF also believed that selling off its balance sheet of government-backed and mortgage-backed securities should affect long-term interest rates and reduce the monetary stimulus the Fed has provided.

“The Fed is facing a tough problem,” Kleinhenz said. “Its playbook for tightening of monetary policy can exert pressure on demand. It doesn’t have a direct ability, however, to influence the supply side by producing more gas, planting fields of needed crops or manufacturing microchips.”

Before the stock market shock, NRF stuck by its forecast predicting retail sales for 2022 will increase between 6% and 8% to slightly less than $5 trillion

According to NRF’s Global Port Tracker Ports handled 2.34 million TEU in March, the latest month for final numbers, up 10.8% from February and 3.2% year over year. It also topped the previous record of 2.33 million TEU set in May 2021

Ports have not reported April numbers, but they are projected at 2.27 million TEU, up 5.7% from last year. May should be 2.3 million TEU, down 1.4% from last year but still the third-highest level on record, NRF pointed out.

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