Consumer are spending less because of inflation, economic fears

More Americans are beginning to hold off on booking flights, getting haircuts, building backyard pools and replacing old leaky roofs — in some of the new signs that the consumer engine of U.S. economic growth could be losing steam.

Over the past several weeks, households had already cut back on big-ticket purchases because of soaring prices, but in a worrisome twist, data suggests consumers are also beginning to tap the brakes on dining out, vacation plans and even routine services like manicures, hair cuts and home-cleaning appointments. Business owners around the country say rising prices, dwindling savings and concerns of a souring economy are taking a toll on household spending decisions.

At Olentangy Maids in Columbus, Ohio, more customers are putting off or canceling home-cleaning appointments. Some regulars are trying to negotiate lower prices, while others have stopped tipping altogether, co-owner Keith Troyer said.

“It hasn’t been a massive drop off, but enough that it’s been noticeable,” Troyer said. “Quite a few clients have called saying, ‘Hey, my wife got laid off. We need to cancel,’ or ‘Can I switch from biweekly to monthly?’ Prior to this month, that’s something that hardly happened.”

Consumer spending, which makes up more than two-thirds of the U.S. economy, has held strong through April even with inflation at historic highs. But there are growing signs that the spending streak could be ending.

Retail sales slowed last month for the first time this year, driven by a 4 percent drop in car sales. U.S. flight bookings dipped 2.3 percent in May from a month earlier, according to data from Adobe Analytics. And both high- and low-income Americans have begun pulling back, particularly on services, in the past four to six weeks, according to an analysis of credit card data by Barclays. The slowdown in spending is now concentrated in services, not goods, the bank found in a new analysis of credit card data.

“All through 2022, the narrative has been that as COVID faded, households would ramp up spending on services,” Barclays analysts wrote in a note this week. “And indeed, that narrative has been true for much of this year. But … services spending seems to be slowing considerably.”

Spending on services like travel and restaurants, which was growing more than 30 percent from 2021 rates this year, has now slowed to half that pace, according to the Barclays analysis.

Customers at Salon Simis in Fairfax, Va., have begun cutting back in new ways. Clients who used to come in every four weeks are now going 12 weeks in between appointments, owner Ahmet Sim said. Others are bargaining for lower prices or opting for partial treatments instead of highlights all over. Overall sales are down 20 percent from a year ago. Average tips have also fallen, from about 20 percent to 10 percent.

“Just in the last month, I’ve started noticing that clients are bargaining like crazy,” Sim said. “They’ll say, ‘My bill is usually $500 for color and highlights. What can you do to reduce it?’ ”

He tries to work with them, he said, by using lower-priced color lines or passing blow drying services to less-experienced stylists. But he’s feeling the pinch of inflation, too: Boxes of disposable gloves have gone from $7 to nearly $25 in two years. Hair dyes that used to cost $25 are now closer to $40. Sim raised prices during the pandemic, once, but he’s worried another markup would alienate more customers.

“People are cutting back left and right,” he said. “They’re saying, ‘I’m sorry. I can’t afford this anymore.’ ”

These early signs of a slowdown across a broad range of products and industries, including travel and restaurants, challenge the notion that Americans have simply shifted their spending from goods to services. The hope until now had been that after two years of stocking up on products like cars, furniture and appliances, Americans would splurge more on vacations, dining out, manicures and other services they’d mostly put off for much of the pandemic.

Meanwhile, one benchmark showed growth in the U.S. services industry slowed in May to its lowest level since February 2021, according to a closely watched index from the Institute for Supply Management.

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“The goods side [of spending] is definitely weakening, but if you look closely, services are, too,” said Kevin Gordon, senior investment research manager at Charles Schwab. “Restaurant sales have eased, travel-related spending is weakening. The weight on the consumer is becoming too much — whether because of inflation or other factors — and that’s across income groups.”