Shoppers are still willing to buy even as smaller job and wage gains and high interest rates are slowing the growth of consumer spending, according to Jack Kleinhenz, chief economist for the National Retail Federation (NRF). “U.S. economic growth for the remainder of this year will depend on several factors but particularly the pace of job growth, inflation and what actions will be taken by the Federal Reserve,” Kleinhenz said. “The good news is that the economy is growing, inflation is moderating, and overall fundamentals look fine as increased consumer spending supports underlying momentum.”

Kleinhenz’s comments came in the June issue of NRF’s Monthly Economic Review, which said gross domestic product is still expected to grow about 2.3 percent compared with 2023, but employment is now expected to grow by an average 180,000 jobs a month, about 50,000 higher than expected this spring. Inflation, as measured by the Personal Consumption Expenditures Price Index, should drop to about 2.2 percent by the end of the year, close to the Federal Reserve’s target of 2 percent.

“The biggest change in the economic outlook since our initial projections is that immigration has been much stronger,” Kleinhenz said, noting that the Congressional Budget Office now estimates that net immigration last year was 3.3 million, more than triple the previous estimate of 1 million. “New immigrants have increased the supply of workers, raising production capacity, closing some shortages in the labor market and allowing the economy to generate jobs without overheating and accelerating inflation.”

 Jack Kleinhenz. Image courtesy of the National Retail Federation
The availability of more workers, particularly in low-wage jobs, can help limit wage-driven inflation, and increased immigration “explains some of the surprising strength in consumer spending since 2022,” Kleinhenz said.

Inflation was higher than expected in the first few months of the year, but much of it was driven by prices for services and the trend is expected to be short-lived, Kleinhenz said. Overall year-over-year inflation stood at 2.7 percent in March, according to the PCE index. But the figure was driven by service-sector prices, which were up 4 percent, while prices for goods were unchanged from a year earlier and have been gradually declining, according to the index.

Kleinhenz said he had expected the Federal Reserve to begin to lower interest rates in July. But with inflation still not down as much as the Federal Reserve would like, a cut isn’t likely to happen until later in the year, Kleinhenz predicted.

“The Fed has reinforced its belief in being data-dependent and that means inflation needs to go down for several consecutive months before the central bank is going to cut rates,” Kleinhenz said. “The Fed has managed to restrain the economy and bring down inflation, and a delay in easing should further cool the economy and keep our initial GDP growth projection intact. The broader trend of lower inflation has not shifted, and the mix of inflation rates should become more favorable, with slower price growth in the service sector and less deflation of prices for goods.”

While the growth rate of consumer spending has begun to ease, owing to slower job and wage gains, higher interest and tighter credit, “consumers clearly remain willing to spend,” Kleinhenz said. Core retail sales as defined by the NRF—based on Census Bureau data but excluding automobile dealers, gasoline stations and restaurants—were up 3.8 percent unadjusted year-over-year for the first four months of the year. That is in line with the NRF’s forecast for 2024 retail sales to grow between 2.5 percent and 3.5 percent compared with 2023.