To weather the gathering clouds and growing turbulence in an economy that is predicted to continue to slow, retailers will have to track cash flow closely, invest selectively and hire prudently.

By Phillip M. Perry

After two years of frenetic activity and a post-pandemic recovery, retailers will likely confront a tougher operating environment in 2023. Growing headwinds include rising inflation, higher interest rates, a softening housing market, continuing supply-chain disruptions, declining capital investments, and escalating costs for wages and energy. 

“2023 is likely to be a challenging year for retailers,” says Scott Hoyt, Ph.D., senior director of consumer economics for Moody’s Analytics. “We are projecting growth of only 2.8 percent, well below the sector’s historic 4.3 percent average.” The forecast represents a decline from the 8.3 percent increase expected when 2022 numbers are finally tallied. The recent trend is well below 2021, with its 17.5 percent increase fueled by a consumer shift away from services and toward goods.

“Of the many factors weighing on growth, the biggest will be a slowdown in inflation, since retail activity is measured in nominal terms,” says Hoyt. Moody’s Analytics forecasts that by the end of 2023, inflation will have declined from 8.2 percent in October 2022, when this article was written, to the 2 percent target hoped for by the Federal Reserve. 

Inflation is kind of a two-edged sword because it helps raise merchandise prices while dampening shopper behavior. While retailers will be hurt by a decline in inflation during 2023, rising prices have not been a panacea in 2022. “Inflation is particularly pernicious for retailers right now because it is running higher today for goods than for services,” says Hoyt. “That has been encouraging consumers to switch to more spending on the latter.”

As for the current state of shopper psychology, it remains as unsettled, as it was a year ago. “It’s hard to get a handle on consumer confidence right now,” says Hoyt. “If you ask people about their finances and they think about the stock market or gasoline prices compared to a year ago, they’re really depressed. If you ask them about the labor market and their job situation, they’re feeling pretty good.”

Other factors that will weigh on retail activity in 2023 include the loss of some helpful economic initiatives. “Government stimulus packages, ultra-low interest rates and strong money supply creation had been helping to compel business activity until mid-2022,” says Anirban Basu, Ph.D., J.D., chairman & CEO of Sage Policy Group in Baltimore, Md. “All those fundamentals have been inverted.” 

The deceleration in retail operations is echoed in the larger economy. “We expect real Gross Domestic Product [GDP; the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time] to increase by 0.7 percent in 2023,” says Bernard Yaros Jr., assistant director and economist at Moody’s Analytics. “The projection for 2022 is 1.7 percent. Both figures represent much slower activity than the 5.9 percent increase of 2021.” (GDP, the total of the nation’s goods and services, is the most commonly accepted measure of economic growth. “Real” GDP adjusts for inflation.)

The slowdown in the overall economy should have a depressing effect on corporate profits, projected by Moody’s Analytics to increase at a 5.2 percent clip in 2023. That represents a decline from the 7.9 percent figure anticipated for 2022. Both estimates are much lower than the 25 percent increase of 2021. 


Reports from the field support the analysis of economists. “In the first half of 2022, many of our members were still experiencing high demand,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pa.,-based regional organization with more than 390 member companies. “But as the year progressed, there was a significant slowdown caused by the labor shortage, inflationary issues and global events.” 

With its diverse membership in food processing, defense, fabrication and machinery building, Palisin’s association is something of a proxy for all American industry. The good news is that strong employment conditions at the association’s members—as well as at companies elsewhere in the nation—is helping alleviate the negative impact of the economy’s headwinds. Moody’s Analytics expects a continuation of that favorable condition, forecasting an unemployment rate of 4.1 percent by the end of 2023. That’s not much higher than the 3.7 percent rate of late 2022. (Many economists peg an unemployment rate of between 3.5 percent and 4.5 percent as the “sweet spot” that balances the risks of wage escalation and economic recession).

High employment levels tend to spark wage increases that fill workers’ pockets with cash to spend at retailers. “Wage rates, as measured by the Employment Cost Index (ECI), remain very high by the standards of the last couple of decades,” says Hoyt. Increases in 2023 are expected to come in at 3.7 percent, a healthy level that reflects the strong growth of a tight labor market. “While we’ve had growth greater than 3 percent for the last three years, prior to 2020, the last time we had growth in the ECI of greater than 3 percent was 2007.” On the flipside, higher wages increase operating costs that can dampen profits.


The tight labor market hits profitability not only in the form of higher wages but also in a scarcity of the very workers needed for retail operations. “Employers will be very focused on labor availability in 2023 as baby boomers continue to retire and the supply of immigrant labor has yet to fully recover from severe pandemic-related disruptions,” says Yaros. “Despite a slowing economy, layoffs are low, indicating that businesses are holding onto labor in a reaction to the hiring difficulties they encountered during the pandemic.”

When will the available workforce grow? Not anytime soon, say observers. “The labor market’s going to be tight for years to come,” says Bill Conerly, Ph.D., principal of Conerly Consulting in Lake Oswego, Ore. “The decade from 2020 to 2030 is expected to have the lowest growth of working-age population since the Civil War. One reason is the retirement of the baby boomers; another is the low rate of immigration over the last few years, prior to 2021.”

Palisin agrees that a labor shortage is going to be a long-term condition and says his members are making moves to lessen the effect. “Employers are trying to be creative in the way they keep and retain workers, not only by offering higher salary rates but also by extending benefits and encouraging work flexibility. They are also investing more in automation for labor-intensive tasks.”


Higher wages and scarce workers are not the only forces threatening retail profits. Another major factor is a rise in interest rates—the Federal Reserve’s favorite tool for fighting inflation. “The purpose of increasing interest rates is to drive down demand,” says Palisin. “So, our members are expecting to see a decrease in new orders that will impact the overall economy. Also, many of our companies have lines of credit that rely on floating interest rates. Rising rates will take a hit to the bottom line as companies decide whether to utilize those lines of credit to support their cash flow and investments.”

Adding downward pressure is the disruption in the delivery of goods that continues to plague retailers large and small. “Supply-chain problems have improved a bit over the past year, but there hasn’t been the significant resolution we had hoped for,” says Palisin. “Random shortages in materials and deliveries are still plaguing our members, and that’s leading to backlogging of orders. Companies just can’t get materials or parts.”

Russia’s invasion of Ukraine has worsened the situation, notes Palisin. “The war has created an energy crunch and a disruption in raw materials from that region that have trickled through the economy and exacerbated supply-chain issues.” Companies are responding by expanding their sourcing from countries other than China.


Buyers of homes tend to shop a lot at retailers, and that sector is also entering a period of correction. “The underlying dynamics of the housing market are changing, as lower affordability spurred by higher prices and mortgage rates is weighing on demand,” says Yaros. 

The rise in prices is discouraging consumers from signing on the bottom line. Median prices for existing single-family homes are expected to have increased 11.5 percent during 2022, when final figures are tallied. That comes off a strong 18 percent increase in 2021. Some relief is expected in 2023, when prices are predicted to decline by 2.6 percent. While affordability has sunk to its lowest level since late 2007, the current 30-year fixed mortgage rate is at its highest level since 2000, leading to a decline in purchase applications. 

Tight housing supply is only adding to upward pricing pressure. The inventory of for-sale homes remains historically low, and new ones will be scarce on the ground. “We expect housing starts to fall by 1.8 percent and 2.0 percent in 2022 and 2023, respectively,” says Yaros. “This compares with a 15.1 percent increase in 2021.”

There’s only so much the industry can do to bolster housing supply—one big reason being the above-mentioned labor shortage. “The unemployment rate for experienced construction workers is about as low as it’s ever been,” says Yaros. “Capacity limits have delayed housing completions and contributed to a record number of housing units in the pipeline.”

One bright spot in the housing picture: Mortgage credit quality has never been better. “The percent of loans delinquent and in foreclosure is at a record low,” says Yaros. “This goes to the stellar underwriting standards since the financial crisis, and borrowers’ credit scores are much higher.” While lending standards for mortgage loans are now tightening, the credit spigot is unlikely to seize up as it did during the financial crisis of 2008.


Given the above concerns, it’s little wonder business confidence is taking a hit. “Retailers are worried about a number of things right now,” says Hoyt. He offers the following comments on the most important ones:

• Inflation. “While it does bump up retailers’ nominal sales, it also undermines consumer confidence and spending.”

• Worker scarcity. “Retailers are having to pay a lot to get staff, and turnover is high.” 

• The post-pandemic shift to service spending. People are spending more on travel, hotels and restaurants.

• Rising interest rates. This is another depressant on shopper activity. 

• Recession. Are we currently in one or not? “There’s a lot of talk about the high probability that the Federal Reserve won’t get this right. A recession is never good for retailers.”

• Supply-chain issues. “Delivery disruptions translate into higher costs for merchandise and higher inflation, which eats into real spending and consumer confidence.”

Uncertainty about all of the above is the name of the game, and that makes planning difficult. “We are faced with a kind of two-sided coin,” says Palisin. “The positive side represents strong current orders and a continuing need for more workers while the negative side represents inflationary pressures and global headwinds.”

Which side of the coin will show its face in 2023? Economists advise keeping an eye out for a few key leading indicators. “In the early part of the year, retailers should watch what is happening to the cost of money,” says Basu. “Inflation is the driver of near- and medium-term economic outlooks.” A second vital element, he says, is the employment picture. “Employers should watch for any emerging weakness in the labor market.” Finally, what about consumers? “Any softening of spending would point to a looming recession.”

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The Economy Takes a Breather

U.S. Gross Domestic Product (GDP) Annual Percent Changes

Economists expect growth in the monetary value of goods and services produced and bought in the U.S. to slow even further in 2023.

2014:  2.3 percent

2015:  2.7 percent

2016:  1.7 percent

2017:  2.2 percent

2018:  2.9 percent

2019:  2.3 percent

2020:  -3.4 percent

2021:  5.9 percent

2022:  1.7 percent

2023:  0.7 percent

Sources: The World Bank; projections by Moody’s Analytics

Will Business Activity Decline in 2023?

This article suggests that an economic slowdown is the likeliest scenario for 2023. But what are the chances of a further decline in business activity? 

While Moody’s Analytics sets the odds at 50-50, stopping the trend of continuous negative growth in real GDP will require a bit of luck. “The U.S. economy will enter 2023 being vulnerable to anything that might go wrong,” says Bernard Yaros Jr., assistant director and economist at Moody’s Analytics. He pointed to risks such as a resurgence of the pandemic in China, a worsening of the Russia’s war on Ukraine and another energy supply shock that would hit consumers’ pocketbooks.

Avoiding a decline in business activity will also depend on a couple of things going right, adds Yaros. The ebullient labor market will need to cool down at a pace that softens wage increases without sparking economic turmoil. Most important, the Federal Reserve, which raised interest rates by three quarters of a point four times in 2022, will need to successfully tame inflation without allowing its continual increase in interest rates to spike the economy. 

NOTE: The Fed has hiked rates at it last six straight meetings, something it hasn’t done since 2005. In addition, not since the 1980s has the Fed raised rates 3.75 percentage points in a single year—and many economists think it likely isn’t done yet.