Economists spent much of 2023 warning that a recession could be imminent as the Federal Reserve raised interest rates to their highest level in more than two decades. But for companies like Soergel Orchards in western Pennsylvania, there’s no slowing in sight.
“People are buying decorative things,” said Amy Soergel, the company’s manager, explaining that pumpkins and corn stalks are in high demand and customers come to pick out pumpkins and apples. “People love to pick – people pick everything.”
Sales have increased even though a series of rainy weekends has held back attendance at the farm’s annual fall festival. Demand at the cider store was solid. And the owners are looking forward to a strong season in their holiday decorations business.
Soergel’s busy business is a microcosm of a nationwide trend. Consumer demand unexpectedly boomed in 2023, defying widespread expectations of a slowdown and contributing to strong overall growth. The economy grew at a staggering 4.9 percent annual rate in the third quarter, far faster than the roughly 2 percent pace that Fed officials consider the standard growth rate.
This is great news for American companies. But it is also a source of confusion. Why is the economy still growing so quickly, more than a year and a half after the Fed’s slowdown campaign began, and how long will the recovery last?
Fed officials have raised interest rates above 5.25 percent, making it more expensive to get a mortgage, borrow to expand a business or carry a credit card balance. These steps should impact the markets and cool the real economy. Some parts of the economy have felt the pressure – existing home sales have declined, for example. Yet employers continue to hire and families continue to spend money.
It’s hard to predict what’s next as the all-important holiday shopping season approaches. A solid labor market and cooling inflation could combine to give consumers the resources they need to further stimulate the economy. But many companies are careful not to build too much inventory or forecast too strong a sales outlook, fearing that higher borrowing costs could clash with smaller savings and the cumulative impact of more than two years of rapid inflation designed to make Americans more frugal .
“Sentiment definitely feels bad,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said during an Oct. 19 interview. “The people I talk to are still preparing for 2024.”
What happens with holiday shopping could influence the Fed’s next steps.
The central bank is trying to slow growth for good reason: inflation has been above 2 percent for 30 months. To get prices under control, policymakers must curb demand.
The logic is pretty simple. If strong hiring momentum continues and wage gains prove rapid, people making more money are likely to be confident and continue to spend. And when shoppers are eager to purchase restaurant food, new gadgets and updated wardrobes, it becomes easier for companies to protect their profits by raising prices.
That’s why Fed officials are keeping an eye on how strong consumers and the job market remain as they consider what to do next with interest rates. Policymakers will almost certainly leave interest rates unchanged when they meet on November 1, and some of them have indicated they may stop raising borrowing costs altogether.
But leaders have been eyeing the possibility of a final quarter-point rise if economic data remains positive.
“We are attentive to recent data showing the resilience of economic growth and labor demand,” Fed Chair Jerome H. Powell said in a recent speech, adding that continued surprises “will drive further progress on inflation could endanger and justify further tightening of monetary policy.”
So far, companies have offered a mixed picture of the outlook. Many claim that seasonal shopping is off to a good start. Halloween spending is expected to rise to a record $12.2 billion, up 15 percent from last year’s record $10.6 billion, according to the National Retail Federation’s annual survey. The group is expected to release its holiday forecast this week.
Walmart reported strong sales during the back-to-school season, which its chief executive said was a good indicator of what spending would look like during Halloween and Christmas.
“When back-to-school is going strong, that usually bodes well for what happens with Halloween and Christmas,” Walmart chief Doug McMillon said on a conference call in August.
But some companies are uncertain. Tractor Supply CEO Hal Lawton said during a conference call last week that the retailer was stocking up on fall and winter decor — such as selling a skeleton cow that was a “TikTok viral sensation.”
But “we recognize that there is a broader range of estimates for holiday and consumer spending than we have seen in recent years,” he added.
And some analysts believe winter shopping could prove weak. Craig Johnson, founder of retail consulting firm Customer Growth Partners, expects holiday sales to grow 2.1 percent, the slowest growth since 2012, in a report released Oct. 17.
“The fact that people had a good Halloween does not necessarily mean they will have a good holiday,” Mr. Johnson said. “It’s a different buying mentality and there’s no carryover – you won’t see clothing lines stretching from Halloween to Christmas.”
Retailers report being careful about how much inventory they have during the holidays, and in a Fed survey of business experiences across the Fed’s 12 districts, the word “slow,” “slower” or “slower” was mentioned 69 times.
Part of the challenge with forecasting is that consumers appear to be split into two groups: wealthier consumers continue to spend, while lower tiers of shoppers are either stepping back or looking for deals.
Department store chain Kohl’s says it is seeing such a divide in its customer base and is adjusting its stores accordingly.
Shoppers at Kohl’s in Ramsey, New Jersey, were greeted outside the store with an array of already-discounted holiday items like miniature snowmen and ornaments. This design was done on purpose – Kohl’s executives want the area to appeal to bargain-hungry shoppers.
But in a sign that higher earners could fuel growth, the company has also started stocking items in new categories such as decanters, wine glasses and electric corkscrews.
“We want to make sure we have the right broad assortment for the broad customer base that we have,” said Nick Jones, chief merchandising and digital officer at Kohl. “And that is one element of making sure everything is of great value. But value for money doesn’t always mean a low price.”