Pullback in Consumer Spending Expected This Year

NEW YORK — Will there be a recession in 2023? Depends on whom you ask.

During the recent NRF Show, held at the Javits Center in New York, a panel of economists — Jack Kleinhenz, chief economist for the National Retail Federation (NRF); Sarah Wolfe, an economist at Morgan Stanley; and Kenneth Kim, senior economist at KPMG — discussed the current state of the U.S. economy and offered their outlooks on the new year. 

Morgan Stanley is not forecasting a recession for 2023, but Wolfe said "it's undeniable that growth is going to slow down" this year, and she noted that there will be pockets of the economy that fuel recessionary activity.

"We do not forecast a recession in our outlook, but we do have growth slowing to about 0.3 percent in 2023," Wolfe said. "That's a very painful year and well below potential, which is about 1.7 percent growth, and definitely slower than some of the very strong growth we’ve seen over the last two years."

Kleinhenz and Kim, meanwhile, do believe the United States will officially enter a recession. KPMG forecasts the timing to be the first half of this year. Kleinhenz did not provide a specific timeline, though he does not believe the nation is in a recession currently.  

"Well, I can tell you, we'll have a recession. The question is, when will it be? Next year? Business cycles repeat themselves. Recession is normal. It's a part of the economic fabric," he explained. "At this point, I am not in a position to believe that we are in a recession, and I'm hoping that we could get through this year without being disappointed."

The U.S. economy closed out 2022 better than expected. Gross domestic product (GDP), the sum of all goods and services produced, increased 2.9 percent for the October to December period. Consumer spending, which accounts for about 68 percent of GDP, rose 2.1 percent.

Wolfe does expect a pullback in consumer spending starting in the first half of 2023. Excess savings stockpiles, amassed through fiscal stimulus during the pandemic, helped get Americans through 2022. This year, there will be less excess savings to drive consumer spending.

In the good news column, inflation is coming down. Kim noted that the most recent Consumer Price Index (CPI) report for December showed a 6.5 percent annual rate, which was down from 7.1 percent in November and a peak of 9.1 percent in June.

"We've made measurable progress," he said, adding that for the balance of 2023, he foresees a CPI of 3 to 3.5 percent. "Getting to the 2 percent target will take a little longer past 2023."

All three economists agreed that the strength of the consumer has a lot to do with the labor market. The current unemployment rate is 3.5 percent, a 50-year low. There are some signs of cooling, and the unemployment rate is likely to rise this year, but they said the U.S. labor market overall remains solid, which should keep consumers spending.

"I am still constructive about the consumer," Kleinhenz said. "If you feel secure about your job, you probably have confidence about spending. And right now, I don't believe that [job] security is a big issue for 96 percent of people in the economy."