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NRF: U.S. Economy Appears Resilient as Nation Faces 'Critical Moment'

Fast economic growth and low unemployment would cause an increase in inflation.
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WASHINGTON, D.C. — As inflation continues to ease and the Federal Reserve ponders when to lower interest rates, the nation is in a "critical moment" of waiting to see what will happen next, National Retail Federation (NRF) Chief Economist Jack Kleinhenz said.

"Today we're waiting once again," Kleinhenz said, referring to a point in 2017 when economists were waiting to see if fast economic growth and low unemployment would cause an increase in inflation. "Much like 2017, the economy is going strong, and the labor market is still relatively tight. But this time we're waiting for inflation to come down — and we're also waiting for the Federal Reserve to decide on when to lower interest rates."

[Read more: Three Factors Drove Consumer Spending in March]

As it has over the past two years, the Fed must balance using high interest rates to reduce inflation with the risk that keeping rates too high for too long could slow the economy to the point of recession.

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"We're at a critical moment as consumers, businesses, investors and others wait to learn how they will need to adjust their plans for future economic conditions. Fortunately, the risks for monetary policy look balanced at the moment," Kleinhenz commented in the July issue of NRF's Monthly Economic Review.

According to the report, year-over-year gross domestic product growth dropped from 3.4% in the fourth quarter of 2023 to 1.4% in the first quarter of 2024 — its lowest point since the spring of 2022. A key contributor to the deceleration was slower consumer activity — a goal of high interest rates intended to tame inflation without causing a recession.

Year-over-year inflation as measured by the Personal Consumption Expenditures Price Index dropped from 3.4% in Q1 2024 to 2.6% in May (Q2 2024). Most inflation came in the price of services, which were up 3.9% in May while prices for goods were down 0.1%, NRF reported.

"The Fed likely welcomed data that showed household income, spending and saving were all healthy in May, demonstrating that the economy is growing at a slower-but-steady pace," Kleinhenz said. "The U.S. economy looks resilient enough for the Fed to wait and has afforded the Fed time to do so."

[Read more: On Shaky Ground]

Disposable personal income was up 3.7% year over year in May, while personal consumption was up 5.1% and the savings rate rose to 3.9%, its highest level in four months. In addition, the labor market "continues to display resilience" and has driven income growth ahead of inflation, Kleinhenz said. Employment rebounded strongly in May with a gain of 272,000 jobs following a 165,000-job increase in April. Average monthly job gains through May were 248,000, just under the 2023 average of 251,000.

The June University of Michigan Consumer Sentiment Survey revealed concerns about the effect of high prices and slowing wage growth on families' finances, but also found that consumers were confident inflation will continue to moderate.

Headquartered in Washington, D.C., NRF advocates for the people, brands, policies and ideas that help retail succeed. Retail is the nation's largest private-sector employer, contributing $5.3 trillion to annual GDP and supporting more than one in four U.S. jobs — 55 million working Americans. 

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