A recession is unlikely and the economy is expected to grow slightly in 2023 as consumers continue to cope with inflation and high interest rates, National Retail Federation Chief Economist Jack Kleinhenz said, reversing course from an earlier forecast.
“A month into 2023, the economy is facing stiff headwinds and – with the exception of easing inflation – will likely face more challenges before it gets better,” Kleinhenz noted.
“The debate on whether we are in a recession will heighten over the next few months, just like last year. But while households will probably feel recession-like conditions this year, I do not expect that the downturn will be severe enough to become an official recession.”
The good news, he stressed, is that corporate and household balance sheets “are in the best shape we’ve seen going into a downturn. This should make any economic slowdown mild and limit the downside risks despite my outlook for the economy to straddle a zero-growth path during 2023.”
He pointed out that the economy is more resilient than was expected, but is slowing down as Federal Reserve interest rate hikes adopted to bring inflation under control are having their desired effect.
Whether the economy will see a “sluggish pace of growth” or slips into a “considerable falloff” depends largely on whether the Fed can strike the right balance between interest rates and inflation, according to Kleinhenz.
He added that the slowing momentum of inflation could lead to reassessment of future rate hikes or even a rate reduction, rates will likely remain “in restrictive territory” for the remainder of the year.
While consumer spending grew 2.8% for the year, it was slowing in late 2022, dropping 0.2% month over month in November and another 0.3% in December. Overall retail sales dropped 1.1% monthly in December as gasoline prices and automobile sales fell sharply and holiday sales turned out to be choppy, NRF reported.