First, a slowing economy will keep retail sales growth in check. On a baseline scenario (55% probability), it is forecasted GDP growth to slow to 0.9% in 2023 from an estimated 2% in 2022 and 5.9% in###-###-#### A relatively healthy labor market will, however, continue to boost sales. And there is a significant chance that a recession would make things much worse. In the event of a recession (which Deloitte rates at a 35% probability), the economy would contract, and unemployment would rise. Such a turn of events would likely hit consumer and business demand harder than expected, thereby denting retail sales.

Second, inflation has lowered consumers’ purchasing power, despite gains in nominal income due to the strong labor market. Even though nominal average weekly earnings have increased by 8.3% since December 2020, real earnings have fallen by 5%.5 This will weigh on consumer demand and, hence, retail sales volume. Rising prices, however, will raise the nominal value of retail sales. There are nominal retail sales and real retail sales since February 2020, with the two series diverging since March 2021 due to the impact of inflation. While nominal sales have risen 11.7% since March 2021, real sales are down by 0.7%. Also, high home prices and rising mortgage rates will dent demand for housing, thereby affecting sales at store types that include building materials dealers and furniture and home furnishings.

Third, consumer spending on services has been picking up steadily as consumers return to bars and restaurants, take vacations, and enjoy sporting events as they did before the pandemic. To some extent, consumers are dipping into their savings to make up for what they missed during 2020 and###-###-#### The personal saving rate is now at 3.1%, much lower than pre-pandemic levels. A shift in spending to services will therefore weigh on retail sales at stores selling consumer goods. However, the transition to services is expected to provide some tailwind to food services and drinking venues. Overall, we expect real personal consumer expenditures (PCE) on durable goods to contract by 1.8% in###-###-#### In contrast, services PCE is expected to rise 3.6% in 2023, according to our baseline scenario.