Jan. 17, 2024 — According to the National Retail Federation (NRF), spending growth is likely to slow this year after consumers spent more than expected amid high inflation and interest rates throughout 2023. 

“A year ago, many commentators were skeptical and calling for a recession, but the recession never came,” says NRF chief economist Jack Kleinhenz. “With each passing month, consumers kept spending despite inflation and higher borrowing costs.”

However, these tailwinds are “not necessarily sustainable” in the face of tighter credit conditions, higher borrowing costs, and a slower labor market expansion, Kleinhenz shares. Additionally, recent consumer surveys indicate a number of worrying factors: the outlook for income, business and job market conditions slowing because of higher interest rates, ongoing inflation, and political stress.

The January issue of NRF’s Monthly Economic Review attributed 2023 spending to a tight labor market, a “wealth effect” from a rise in equity and home prices, and savings built up during the pandemic. Compared to 2022, inflation-adjusted gross domestic product grew 2.3%. Additionally, December’s unemployment rate of 3.7% was one of the lowest in decades, and the 4.5% year-over-year increase in wages exceeded the year-end 2.6% rate of inflation as measured by the Personal Consumption Expenditures Price Index, which is followed by the Federal Reserve.

Boosted by a 7% year-over-year increase in disposable personal income, the NRF shares that consumer spending was up 5.2% year over year in October and November, unadjusted for inflation. NRF’s calculation of sales—excluding auto dealers, gas stations, and restaurants—was up 3.7% year over year for the first 11 months of the year.

Despite this, the labor market slowed as job openings fell to 8.79 million in November—the lowest level since March 2021. According to Kleinhenz, this will “impact consumer expectations for employment and wage growth and, in turn, affect spending decisions.”