Behind the data: Insights from NRF’s top economists

Episode transcript, edited for clarity

[00:01:00] Bill: Welcome to Retail Gets Real, where we talk to retail's most fascinating leaders about the industry that impacts everyone, everywhere, every day. Today is a really special episode because we're going to be talking to Jack Kleinhenz, who is NRF's Chief Economist, a role that he has played for over 15 years.

We also have Mark Mathews, who will be stepping in for Jack as he begins his retirement and remains with NRF as our senior advisor. So this episode is an opportunity for us to hear from Jack about some of the things he's seen through the years and to talk to Mark about some of the things that we can expect in the future. So let's get started. Jack, Mark, welcome to Retail Gets Real.

[00:01:43] Bill: Jack, 15 years. That's a long time. Not really a long time. At our point in our lives, it's not a long time. It's just like yesterday.

[00:01:51] Jack: But it's been a very momentous time when you go to go back. When I first started in 2010, we were just coming out of the 2008, 2009 recession. There was high unemployment, slow job growth. We didn't know what the future was all about. The economy was in a situation which was the worst since the Great Depression. And so it was a fascinating time in a complicated world.

[00:02:17] Bill: Why economics? What ever got you looking at that in college? Was it something when you were born and you went to kindergarten? You said, "I want to be an economist." Because I believe that could be the case.

[00:02:27] Jack: When I went to kindergarten, my mother wanted me to get out of the house because I was such a pain in the butt to her. And this is true. But it's a math-oriented discipline, and I'm very interested in data and using data to explain, issues, problems. What's going on?

The field is a problem-solving field. And it's a mix of statistics, psychology, sociology. It's not just money and finance like a lot of people think. And I think what attracts me is that it's the methodology. It's the framework about how to look at an issue and how to question and look at the variables that are interacting to that issue.

[00:03:11] Bill: Mark, the work that you and your team do in the research space, how does that impact how we talk about the economy, the global economy, the national economy? Or predicting the future for what we can expect in retail.

[00:03:29] Mark: Actually, I love what Jack just said because that describes it almost perfectly. You're trying to get answers to questions. You're trying to understand things, and research is very, very similar to economics, and in many ways, because you are trying to answer questions about what's going on.

It's all about having an inquisitive mind and figuring out the answers that people want, asking the right questions, and then collecting the data so that you can understand exactly what's going on.

[00:03:58] Jack: It actually feeds into the forecast. You need to have good data, and the data comes from me thoroughly investigating what's out there. And as we work together, it's understanding that picture of the economy and how the different activities are working together.

In many ways, a forecast, which you were asking about, is a model of reality, but it's not a perfect model. A good forecast if you have them, which I think we've successfully had, it's part science. It's part art, and it's part luck in many ways.

[00:04:34] Bill: Right, for sure.

[00:04:35] Mark: It's that data. I think when people think about it, they see the outcomes. When they think about research, when they think about economics, they see the number. They don't understand all the data and the math that goes into creating those numbers. There's a huge amount of a math analysis. So there's almost this perfect connection between —

[00:04:53] Jack: It's an intersection.

[00:04:54] Mark: Exactly.

[00:04:55] Bill: You said the sociology. I think that goes into the research side of it too. That's a big —

[00:05:00] Mark: Absolutely. Understanding what's on the consumer's mind is so incredibly important. And we do that through surveys. We do that by looking at their behavior, but all of that also feeds into the economic piece and understanding where the consumers are going. That's 70% of the U.S. economy. They're spending. So understanding what they're doing is incredibly important to making that forecast.

[00:05:22] Jack: Well, yes, and you mentioned it. 70% of the economy is consumer spending, and so retail is on the front line, on the immediate front line of how the economy is performing.

[00:05:31] Bill: Jack, when you look back, you think 15 years ago, the data that you had access to, the ease of the data that you had access to or lacked thereof —

[00:05:42] Jack: The difficulty.

[00:05:42] Bill: — yeah. How has that changed over the years? How have you been able to stay in front of that?

[00:05:48] Jack: Let's just take the 15-year period because there has been amazing amount of change in terms of the technology to understand consumer behavior, in terms of high frequency data that's being collected, like we're doing on the [Retail] Monitor. That wasn't available. It came out of the COVID situation because we couldn't gather traditional data.

So we had to invent, innovate, come up with new data that actually was only for short periods of time, but it was very well needed for us to understand what was going on with the consumer. And of course, we've seen the rise of ecommerce in the last 15 years. 

When we start looking at the internet and ecommerce, to me, it was originally to be looked at as a catalog. It was just easy to find things, but it's turned into a full transaction of retail. And of course, you've got the development of social media now in terms of how you influence consumers, and their consumer buying paths.

And one of the other things that came out of COVID, which is interesting, is contactless payments. So we've changed a lot, and because of those changes, data gathering has also come along, but it has become complicated in some ways.

[00:07:00] Bill: I can only imagine. Do you think about the events too, Jack? The Great Recession, followed by all of the world events that have been going on, followed by COVID and the pandemic and inflation and how people respond to that, and the resilient consumer and the smart consumer, all of these things that on a year-to-year basis, it's just this constant shifting and changing. So to create a forecast, how do you take all of that into account?

[00:07:25] Jack: We had some real challenging times. If we go back to 2017, we were dealing with the narrative that retail was in an apocalypse. And if you recall, it was very challenging. We were trying to actually change the narrative because it was wrongheaded. Now, we had several firms that went under, and that was supposedly the indication that the rest of the retail was going to go under because everybody was thinking that we were going to move completely to ecommerce. 

Then on top of it, we've had COVID. There's been very big challenges as an industry, as an organization, as an association to be dealing with these major events that's happening. So again, it's been very fascinating to me because it's finding data where you can and figuring out how to deal with the problems that are at hand. And what are the questions that need to be answered?

So you take that and then go a few years forward and Mark calls me up. "What are we going to do about responding to questions on where the consumer's going, when the pandemic was right in our face." And we were attempting to think about how we could put in certain variables in the model to capture change. 

It was really an unknown. And we just had to wait to see how things developed before we felt comfortable enough that we could make some comments and some belief that this is how things will pan out.

[00:10:04] Bill:  Retail's changed a lot over the last 15 years, Jack. You mentioned earlier the omnichannel side of it. The retailer now, they're going to serve the customer where they want to be served, at the price they want to pay, and the convenience in which they want to engage.

[00:10:22] Jack: I was just at a meeting yesterday, and there was an economist from Amazon speaking about the use of AI. Let me give you an example because I think AI is going to be one of these transformation technologies that will be diffused as the computer and the internet took 10 years to happen.

It might be even faster. But he was given an example that AI goes online to evaluate a product page. There's a description of, let's just say, you're buying footballs, and it tells you it's this size, etc., and where you can buy it.

And so AI goes in there and they figure out what could they optimize on that page so that if they change the word, there'd be better engagement by consumers. So then there's another AI that actually makes the changes.

There's no human interface at this point. So one identifies what needs to be changed. The other one actually makes the changes, and then they basically have another AI that compares the results and then therefore you have an upgrade on that product.

This is very transformative. And I think that retail is going to be able to personalize more the products, be able to reach a broader spectrum of people that we hadn't perhaps in the past. It's really an amazing world that we're living in.

[00:11:39] Bill: It is. But I do think though, that when you look at both the opportunity and some of the challenges of AI, it's pretty vast. I've told people before, and I've probably said it on this program, but my trying to grasp AI is the same as my trying to grasp the infinite growth of the universe.

[00:12:03] Jack: It's very mathematical, by the way.

[00:12:07] Bill: I just can't conceive of it in terms of the opportunity and what it can do. But, Mark, how is the consumer responding to that? Or are they yet? Are they just like, well, this is making it a lot easier?

[00:12:19] Mark: I think like most technologies, the consumer is just a user of that technology and everyone else is freaking out about what that technology means for the economy and for businesses. You see it today, people saying “AI is going to wipe out this sector in terms of jobs. We're going to lose millions of jobs, hundreds of millions of jobs.

AI is going to take over everything.” And that's something that I think I've seen over time throughout my career. Every new invention is going to change the world. Obviously, AI might have a bigger impact than some of the other things, but just like the retail armageddon narrative, I've been fighting the narrative that retail jobs are going away.

Because when you look through history, new technologies, cars, for example, even some of things like that, television, everything that comes in, people are expecting these incredible changes and yet people continue to be employed. 

There haven't been any technology-led destructions of our economy. So I think AI is transformative, but I take the impact with a grain of salt because I don't actually expect that it's going to lead to these dramatic changes that people say.

[00:13:32] Bill: I'm very curious as to why retail? You have a lot of clients, but you're really focused on retail. Why?

[00:13:41] Jack: My background is actually in economic monetary theory and money and banking. And when you think about money and banking, that's retail. It's right on. You're a customer. And understanding banking, because it was very regional and localized, you need to understand where your economy is. 

So the transformation from being at a macro level and thinking about money and banking and then going to the micro level, thinking about consumers is very easy. People need money, and what are they spending on? Because just a simple thing, in money and banking, you have to make sure that there's enough cash for people to actually facilitate the transactions.

And what are they using it on? Mostly, like we mentioned, 70% is on goods and services. So I think it's just the composition of retail. In the aggregate, it's very important. It's a leading industry in the United States and in the world, but it's the consumer, which I feel like I understand and actually affect through what I do more specifically than at a high level. 

[00:14:46] Bill: You just hit on something, and I'm curious, Mark. It's the globalization of retail. There are no boundaries anymore. It doesn't matter if you're shopping in the United States and buying in Italy or if you're in Italy buying from Canada. How do we take that into account when we talk about the growth of retail or retail's health and resilience?

[00:15:08] Mark: It's fascinating just in my lifetime to see the changes. It used to be that your shopping universe was those places that you could drive to in a short enough amount of time that were open when you wanted to drive to them. And now the world is your oyster.

Like you said, you can get anything you want from anywhere in the world at almost any time, and that's just absolutely fascinating to me. But the change that is created in the consumer and the change that is created in our industry is amazing and profound.

[00:15:42] Jack: And we really saw that during the pandemic, the globalization or the inability of the globalization to facilitate consumer needs.

[00:15:51] Bill: Jack, the monthly economic report that you do, where are we today in the economy?

[00:15:56] Jack: That's a good question. In my view, I think the economy's actually in a pretty good place. And I know there's a lot of narratives around a difference of a view, but we are near full employment or at full employment. Inflation is elevated. We just got data out on the CPI and the PPI, and it is higher than we'd want, but it's still much lower than it was a couple of years ago. 

However, I see upward pressure on inflation and downward pressure on employment largely because of the uncertainty with tariffs. There's issues that cloud how people are going to react to prices, how producers are going to react to the tariffs. And I think higher tariffs are going to lead to an increase in inflation and possibly higher unemployment, which will slow down the economy not abruptly, but gradually. 

One of the good things I want to mention why I think we're in a good place, and we're fortunately in a good place at this time, is that the household balance sheet is in pretty good shape, and so is the corporate balance sheet. So if this occurred, let's just say on the edge of we were coming out of a recession, we would have a completely different outlook.

[00:17:09] Bill: What is the consumer saying, Mark?

[00:17:12] Mark: The consumer is uncertain. We see that in the data. In a way, the consumer right now reminds me of the consumer that we saw when inflation was running rampant a few years ago. They are uncertain. And they are holding back, and they're trading down.

So we see a lot of people being very, very careful with their money, a lot of people buying at cheaper price points, a lot of people trading down from mid-price retail to lower price retail. I think the difference for me, and Jack mentioned that wealth effect, is that if you look at 2019 to 2023, household liquid assets grew by 25% during that period because of the stimulus. 

Since that period, household liquidity has decreased by 7%. And this is particularly amongst lower-income households. So my concern, if we get into a situation where prices continue to edge upwards, is a lot of those lower-income households no longer have those resources to draw upon. They're living paycheck-to-paycheck, and those price increases are going to start to bite.

[00:18:21] Jack: Yeah. It's a delicate balance because most of the spending though, is with the upper middle- and upper-income people — 60% of spending comes from that. But they can be affected very much so by the world of what's going on with tariffs. If they lose their willingness to spend because they're worried about their ability to spend, which is really the uncertainty right now.

[00:18:46] Mark: Yeah. And I would say that I'm less concerned about consumer uncertainty than I am about business uncertainty, because businesses are pulling back. If you look at previous recessions, the main driver of GDP declines was not a reduction in consumer spending.

Actually, consumers actually spent through some of those recessions. The main driver of GDP declines was a decrease in business investment. What we're seeing right now is businesses very unsure about how much they can invest, and we see hiring pulling back. 

The retail industry, in the last few months, hiring has been at the lowest point it has been in the last 25 years. Now, luckily, they're not getting rid of people, but you can see the pullback, and that's what has me concerned.

[00:19:31] Jack: Well, just to not only the immediate nature of what we're talking about, but actually the more longer-term issues, one important part of the growth in the economy is population. And the immigration issues that we're dealing with today is impacting our labor force.

And if you have a smaller labor force and there isn't as much economic activity, then you're going to have a slower growth in the outer years. And of course, we have some major concerns over government policy issues and issues that have been pushed out in time, let's just say, managing Social Security, managing Medicare, etc.

[00:20:11] Mark: Yeah. Such an important point. As you know, Bill, I lived in Europe for 17 years. There used to always be conversations about the U.S. is a faster growth economy than Europe. And it is. Over that time period, the U.S. was growing at 4%. Europe was growing at 2%. Almost all of that disparity in growth was population. 

[00:20:30] Jack: There you go.

[00:20:32] Mark: We have higher birth rates because of immigration. We have higher immigration. And that has helped drive our economy forward. So it's very worrisome when you layer that on top of all the other things we're seeing in the economy.

[00:20:46] Bill: Yeah, for sure. All right. Lots of students, Jack, as you know, listen to Retail Gets Real. If I'm a student and I'm trying to decide on my major and I love math, why economics?

[00:21:26] Jack: That's a great question because economics can take so many different dimensions, and it's really a basis for decision-making and problem-solving. So in the world of marketing, you still have to understand with the mechanics and the question that you're trying to resolve in terms of getting to the consumer. 

I think if you're interested in problem solving, are mathematically oriented, are increasingly curious about how the world works and how people think, this is a great major to be in or definitely to have classwork and as a cognate to any of the other fields right now.

[00:22:09] Bill: Cool. Jack, before we went live, we were talking about books. What book are you reading right now?

[00:22:18] Jack: Let me mention, I am reading a book right now that I just picked up, and so I haven't gotten too far into it, and it's by Levin. He's a former speech writer for President Reagan. So I can't give you much indication, but there's been a couple of ones that I have enjoyed just recently. One of them is called “Flags on the Bayou.” It's a historical fiction and a mystery. And that's by James Burke. You said that —

[00:22:41] Bill: Yeah, yeah, yeah. I like James Burke.

[00:22:42] Jack: And then the other one I just finished about two weeks ago; it was called “Trust” by Hernan Diaz. And again, it's a mystery, and it's about the Gilded Age in the United States. And it's fascinating because it's a very unique way of writing, which I found very curious.

[00:22:58] Bill: Interesting. Mark, are you reading anything?

[00:23:01] Mark: I actually just worked my way through some very long, boring books, and I was looking for something a little bit more interesting. So right now, I am rereading probably for the eighth time Bill Bryson's “Notes from a Small Island.”

Bill Bryson was an American who moved to England, just like myself. And it's his observations. It's one of the funniest books I've ever read. And if I ever need something to cheer me up or pick me up, I pick it up. And I don't always read it cover-to-cover, but I'll read a chapter here and there. Invariably lifts my spirits.

[00:23:33] Bill: Excellent. Mark, Jack, it has been a pleasure once again to have you on Retail Gets Real.

[00:23:41] Jack: Thank you so much, Bill.

[00:23:42] Mark: Yeah. Thanks, Bill.

[00:23:43] Bill: Thank you, Mark, Jack for all of the work that you've done, all the insights you've provided, and what you've done to help our industry, the consumer and certainly the National Retail Federation.

[00:23:53] Jack: Yeah. It's been actually an exciting period of time to work with. Thank you.

[00:23:57] Bill: Thank you. And thank you all for listening to another episode of Retail Gets Real. You can find more about our podcast at retailgetsreal.com. I'm Bill Thorne. This is Retail Gets Real. Until next time. See you then.