Slowing inflation and strong growth of GDP are set to keep labor markets tight, wages growing and consumers spending in 2023. According to a new analysis from S&P Global Market Intelligence, retail sales are on track to outpace expectations this year.

Holiday retail sales are expected to grow 3.3% in 2023, below the pre-pandemic average of 3.9% and well below rates seen in recent years as lower retail inflation dampens growth of current dollar sales.

Holiday prices are expected to rise just 0.5% this year, following blistering retail inflation of 6.1% in 2022.

Real holiday retail sales are expected to rise almost 3.0% in 2023, near the pre-pandemic average of 3.2%, signaling a welcome return to 'real' sales growth after falling flat last year.

Online holiday retail sales are expected to grow 9.4%, beating last year's 8.7%, as 1 in every 4 dollars spent this year will be online, up from 1 in 5 in 2019.

Retail sales surged in the third quarter

Total retail trade and food service sales fell 0.1% in October but followed strong growth in September that was revised even higher. Including the latest data, total retail trade and food service sales rose at a red-hot annual rate of 7.0% in Q3. Fueling this spending is a tight labor market and rising wages, up 5.3% from a year ago. Third-quarter GDP growth was a robust 4.9%, more than twice our estimate of potential output. Given the lags from GDP to employment, a notable easing of labor market conditions is unlikely until mid-2024.

Holiday retail sales in 2023

For consumers, the holidays came early this year. Wages have continued rising and retail inflation has cooled dramatically. At the same time, competition among retailers has only intensified, so in a real sense, consumers can expect their dollars to go further this year.

For retailers, lower costs and the resolution of supply chain issues mean inventories have stabilized and they are in a better position to try and convince consumers to stretch their budgets. Yet sales this year have been uneven, and no retailer wants to find themselves out in the cold. So, consumers can expect the holiday sales to come early and often.

In S&P Global Market Intelligence's forecast, holiday retail sales are expected to grow around 3.3% in 2023, below the pre-pandemic average of 3.9% and well below the lofty rates seen in recent years, as slowing retail inflation lowers current dollar sales totals.

Holiday prices are expected to rise less than 0.5% this year, following a blistering 6.0% rise in 2022. Holiday retail sales adjusted for the change in retail prices are expected to rise almost 3.0% this year, near the pre-pandemic average of 3.2%, and a welcome return to growth after falling flat last year.

Retail outlook in 2024

Consumer spending grew a robust 4.0% in the third quarter. Nevertheless, growth of real disposable income slowed notably, due primarily to special factors including the rise in Medicaid disenrollments and end of COVID-era benefits.

And while the economy's resilience this year has tempered concerns of an imminent recession, a period of below-trend growth next year and an accompanying increase in the unemployment rate will be necessary to reduce wage growth to a range consistent with the Fed's 2% inflation target.

S&P Global Market Intelligence expects the fourth quarter to be the start of a transition to a slower pace of growth in 2024. In our forecast, real PCE is expected to grow at a 2.4% annual rate in the fourth quarter, as core PCE inflation rises to 3.0% to end the year.

Total retail and food service sales growth is expected to slow from 3.3% this year, to 1.7% in 2024. Real retail sales growth, that is, the growth of retail sales adjusted for the change in retail prices, is expected to slow from 1.6% this year to 1.3% in 2024.

(Note: S&P Global Market Intelligence defines holiday retail sales as total retail sales excluding automobile dealerships, gasoline stations, and food services. Online holiday retail sales are defined as electronic shopping and mail-order retail sales.)

Learn more about our economic data and insights

Listen to our latest podcast episodes

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.