Looking at the U.S. economy, it is easy to see it is in a much different place than a year ago. At this time last year, we were waiting to see the effectiveness of COVID-19 vaccines and their distribution. While the public health situation has greatly improved, the impact of the pandemic continues to spread through the economy. That ripple has extended into 2022 and includes a disproportionate impact from inflation reaching a 40-year high brought about by strong demand interacting with restricted supply. Complicating the picture is the very high uncertainty associated with Russia’s war in Ukraine and its effect on the world economy. While the United States has a limited trade link with Russia, the war continues to overshadow economic news and could have a potentially serious effect on prices for energy and commodities, adding to inflation concerns. The bottom line is that there are just as many uncertainties weighing on the outlook for growth as there were a year ago, even if some of the forces at play have changed.
The latest data shows that the U.S. economy’s outlook has strong momentum and consumers remain in the driver’s seat. After capping off 2021 with 5.7 percent growth in gross domestic product — the strongest rate since 1984 — the economy is set to grow at a still-healthy 3.5 percent pace in 2022, adjusted for inflation. We expect personal consumption expenditures, which account for the bulk of economic growth, to also grow by 3.5 percent, down sharply from an unsustainable 7.9 percent in 2021 but above the average yearly growth of 2.2 percent during the previous expansion from 2009 to 2019.
This year, our optimism on the path of retail sales is grounded in rising income growth, which will be supported by both job gains and increasing wages. Strong household and business balance sheets should also support further expansion of the economy despite continued supply chain disruptions, tighter monetary policy and geopolitical uncertainties.
Excluding automobile dealers, gasoline stations and restaurants, NRF expects retail sales to increase between 6 percent and 8 percent in 2022 to between $4.86 trillion and $4.95 trillion. That would build on 14 percent growth in 2021, which was the highest rate in more than 20 years. The 2022 forecast is notably above the average annual growth rate of 3.7 percent for the 10 years before the pandemic. The projection includes online and other non-store sales, which are expected to increase between 11 percent and 13 percent to a range of $1.17 trillion to $1.19 trillion.
The business sector is also a major contributor to economic growth. Business fixed investment in equipment, buildings and other expenses to increase capacity was fairly strong in 2021, advancing on an annual basis of 7.3 percent, and is expected to increase at a 5 percent pace in 2022. More investment means more production and typically more jobs and consumer spending.
Nearly every U.S. labor market indicator is signaling strength, including low unemployment rates, fewer Americans applying for unemployment benefits, 14 months of payroll gains, record job openings and wages rising at a robust pace. I expect solid payroll growth in 2022, averaging approximately 290,000 jobs each month, while the unemployment rate should dip to 3.6 percent. The constraint on job growth is not on the demand side but rather on the supply side as the labor shortage continues. With the unemployment rate nearing the 50-year low seen just before the pandemic, the pool of available labor is diminishing. Nonetheless, higher wages could entice people who are not currently searching for work to do so.
The highest inflation in decades is hitting consumers, but efforts to bring it under control could have an impact as well. The Federal Reserve increased its benchmark interest rate by a quarter of a percentage point in March and signaled more hikes to come in an attempt to bring inflation under control. What the Fed is doing is warranted given the pandemic, supply shocks and the elevated inflation that has resulted. But the Fed faces the challenging task of slowing inflation without stalling economic activity, which is made more complicated as the Russia-Ukraine conflict rages on. The Fed has indicated that it will seek seven interest rate hikes in 2022, culminating in a 1.9 percent federal funds rate by year-end, followed by four more in 2023. How much the Fed raises rates will depend on how the economy progresses. Higher interest rates are likely to cool rate-sensitive consumer spending such as home and auto purchases and the use of credit cards, but in my view, the U.S. economy is strong enough to withstand the suggested rate hikes. The Fed’s plans are more or less in line with NRF’s assumptions for its actions that underlie our current retail sales projections.
Given the recent geopolitical disruptions, it is likely that there will be some resetting of the U.S. and world economies and that both businesses and consumers will be affected, but it is too soon to tell by how much or for how long. We are in tumultuous times and our forecast represents our best view of the outlook given the data and developing events. Considerable uncertainty abounds this year, and we will be monitoring all developments very closely.