U.S. consumers are still buying more than last year, but spending growth is slowing as the economy settles down amid higher interest rates intended to reduce inflation, according to a report from the National Retail Federation (NRF).
“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,” NRF Chief Economist Jack Kleinhenz said in a release.
“Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services,” Kleinhenz said. “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,” Kleinhenz said.
By the numbers, the nation’s gross domestic product (GDP) grew at a 2.4% annual rate adjusted for inflation in the second quarter. That was up from 2% in the first quarter but in line with 2.1% for all of 2022 and far below the 6% seen in 2021, NRF said in the August issue of its “Monthly Economic Review.”
Consumer spending, which makes up about 70% of GDP, played a major role in the continued expansion, NRF said. But year-over-year spending growth slipped from 4.2% in the first quarter to 1.6% in the second. Retail sales as calculated by NRF – excluding automobile dealers, gasoline stations and restaurants – were up 3.1% unadjusted year over year in the second quarter. That kept up with inflation but was below the 4% 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% year over year in the second quarter. That was down from 4.9% in the first quarter but still far above the Fed’s target of 2%. The Fed responded by raising rates another quarter-point last month to a range between 5.25% and 5.5%, the highest level since January 2021.
Two other signs of a cooling economy include revolving credit (mostly credit cards)—which contracted by nearly $1 billion in June—and the labor market, which posted 9.58 million job openings in June, down slightly from 9.62 million in May.