Consumers are spending less because of inflation, economic fears

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More Americans are starting to delay booking flights, getting haircuts, building backyard pools and replacing old leaky roofs — in some of the newest signs that the consumer engine of US economic growth may be running out of steam.

In recent weeks, families have already cut back on more expensive purchases because of soaring prices, but in a worrying turn of events, data suggests consumers are also starting to put the brakes on dining out, vacation plans and even routine services like manicures. , haircuts and housekeeping appointments. Businesses across the country say rising prices, shrinking savings and worries about a sour economy are weighing on household spending decisions.

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

“It wasn’t a massive drop, but enough to be noticeable,” Troyer said. “A lot of customers called saying, ‘Hey, my wife got laid off. We need to cancel’ or ‘Can I switch from biweekly to monthly?’ Before this month, this was something that hardly ever happened.”

Consumer spending, which accounts for more than two-thirds of the US economy, remained strong through April, even with inflation at all-time highs. But there are growing signs that the spending streak may be ending.

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

“Throughout 2022, the narrative has been that as COVID fades, households will increase spending on services,” Barclays analysts wrote in a note this week. “And indeed, that narrative has been true for much of this year. But… service spending appears to be decreasing considerably.”

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

Customers at Salon Simis in Fairfax, Virginia, began to cut in new ways. Clients who used to come every four weeks are now 12 weeks apart between appointments, owner Ahmet Sim said. Others are haggling for lower prices or opting for partial treatments over highlights throughout. Overall sales were down 20% from a year earlier. Average tips also dropped, from around 20% to 10%.

“Just last month, I started to notice that customers are trading like crazy,” Sim said. “They’ll say, ‘My bill is usually $500 for colors and lights. What can you do to reduce it?’ ”

He tries to work with them, he said, using cheaper color lines or passing dryer services to less experienced stylists. But he’s also feeling the pinch of inflation: 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 has raised prices during the pandemic, once, but is concerned that another booking would alienate more customers.

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

These early signs of a slowdown across a wide 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 so far has been that after two years of stocking up on products like cars, furniture and appliances, Americans would spend more on vacations, dining out, manicures and other services they mostly postponed for much of the pandemic.

Meanwhile, a benchmark showed that growth in the US service sector 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 commodity side [of spending] it’s definitely weakening, but if you look closely, so is services,” said Kevin Gordon, senior manager of investment research at Charles Schwab. “Restaurant sales are down, travel-related spending is weakening. The burden on the consumer is becoming excessive – whether because of inflation or other factors – and this is happening across all income groups.”

Overall, flight searches on booking site Kayak are down an average of 13% so far this month, compared to the same pre-pandemic period in 2019. Restaurants are down 11% in the week ending June 16, compared to the same week of 2019.

While lower-income households have been hit hardest by inflation, higher-income households are also starting to cut back, especially as they watch investments — from stock portfolios to homes — lose value, Gordon said. Household wealth fell for the first time in two years in the most recent quarter, largely because of a $3 trillion drop in stock values, Federal Reserve data show.

Markets continued their volatile decline this week, with three major stock indices deepening the year’s losses and the S&P 500 index ending its worst week since March 2020.

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At Posh Luxury Imports, a Los Angeles car dealership that also leases luxury vehicles, owner Omar McGee said both consumer demand and their credit scores are markedly lower than they were six weeks ago.

“I see more credit problems,” McGee said. “More people have run out of cards or delayed payments. Ultimately, that means people need to be a lot more cautious with their spending.”

Credit card debt, which plummeted during the pandemic when Americans used government stimulus to pay off balances, has rebounded to all-time highs. As of June 1, Americans had $868 billion in consumer debt, up nearly 16% from last year, according to Fed data.

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And while the wealthiest continue to rent Lamborghinis and Bentleys, McGee said there has been a noticeable decline in the number of tourists opting for high-end rentals.

“I can say that travel is down, tourism is down,” he said. “A lot of upper-middle class customers used to come to town and splurge, but you can see that is dropping dramatically.”

This consumer hesitation follows months of inflation at 40-year highs. Prices rose 8.6 percent last year, pushing up costs for a number of essentials, including gas, to a record $5 a gallon.

The biggest bright spot in the economy remains the strong labor market, with the unemployment rate at a pandemic low of 3.6%. Demand for workers hit record levels in April, with about twice as many openings as job seekers. Weekly jobless claims have recently started to increase, but they are much lower than they were during most of the pandemic.

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With workers still managing to find jobs, the Fed made a sharper move this week raise interest rates by three-quarters of a percentage point in hopes of cooling the economy down enough to contain inflation without driving it into recession. Despite central bank assurances that it can achieve a “soft landing,” businesses and households are increasingly concerned about the state of the economy as well as their personal finances. In fact, US consumer sentiment has plunged this month to its lowest level on record, according to a University of Michigan index.

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“The consumer is under stress,” said Douglas Duncan, chief economist at mortgage giant Fannie Mae, which expects a recession next year. “We see this in the decrease in retail sales and in the increase in credit card use. However, we don’t expect things to fall apart right away. It will be a slower decline.”

In fact, small businesses across the country are reporting small signs of customer pullback. Morehead Pools, which specializes in luxurious backyard pools in Louisiana, is booked until next summer, according to chief executive Michael Moore. But in a sign that higher-income consumers may be thinking twice about spending, new queries are down 30% so far this year.

“Once you go from $4 [per gallon of gas], everybody is feeling it at the pump and they’re not earning enough on the front end to get over it,” Moore said in an analyst call held by Jefferies this week. “The cost of energy and inflation and then the cost of money… that is really going to reduce demand in our industry.”

Noffke Roofing in Mequon, Wisconsin has seen insatiable demand during the pandemic. But lately, economic jitters are driving many customers to fix their roofs instead of replacing them. Many are also switching to cheaper materials, such as shingles made from asphalt instead of cedar.

“We’re definitely starting to see a lull,” said President Ben Noffke. “Customers are saying, ‘I know it’s time to buy a new roof, but can we have a little more time on this one?’ They are thinking a lot more about their budgets.”

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