Americans pull back on travel, restaurants

Consumers cut back on spending as worries over inflation escalate

More Americans are holding off on booking flights, getting haircuts, building backyard pools and replacing 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 purchase because of soaring prices, but in a worrisome twist, data suggest consumers are also beginning to tap the brakes on dining out, vacation plans and routine services like manicures, hair cuts and home-cleaning appointments. Business owners around the country said 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, co-owner Keith Troyer said.

“It hasn’t been a massive drop off, but enough that it’s been noticeable,” Troyer said.

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 travel and restaurants, which was growing more than 30 percent from 2021 rates this year, has 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. Overall sales are down 20 percent from a year ago. Average tips have also fallen, from 20 percent to 10 percent.

“Just in the last month, I’ve started noticing that clients are bargaining like crazy,” Sim said.

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 slowdown across a broad range of products and industries 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.

While low-income families have been hardest-hit by inflation, higher-income households are also beginning to cut back, especially as they watch investments - from stock portfolios to homes — lose value, said Kevin Gordon, senior investment research manager at Charles Schwab.

Household wealth fell for the first time in two years in the most recent quarter, in large part because of a $3 trillion plunge in the stock values, Federal Reserve data shows.

The markets continued their volatile descent last week, with three major stock indexes deepening losses for the year and the S&P 500 index closing out its worst week since March 2020.

The biggest bright spot in the economy remains the strong jobs market, with the unemployment rate at a pandemic low of 3.6 percent.

Demand for workers neared record highs in April, with about twice as many openings than job seekers.

Weekly claims for unemployment insurance have recently begun to creep up, but they are far lower than they had been during most of the pandemic.

With workers still able to find jobs, the Fed made a sharper move this week to hike interest rates by three-fourths of a percentage point in hopes of cooling the economy enough to curb inflation without tipping it into recession.

Despite the central bank’s assurances that it can pull off a “soft landing,” businesses and households are increasingly worried about the state of the economy as well as their personal finances.

Indeed, U.S. consumer sentiment plummeted this month to its lowest level on record, according to an index by the University of Michigan.

“The consumer is coming under stress,” said Douglas Duncan, chief economist at mortgage giant Fannie Mae, who expects a recession next year. “We see that in decreasing retail sales and in rising credit card usage. We don’t expect things to fall apart immediately, though. It’ll be a slower decline.”

“The consumer is coming under stress. We see that in decreasing retail sales and in rising credit card usage. We don’t expect things to fall apart immediately, though. It’ll be a slower decline.”

— Douglas Duncan, chief economist at mortgage giant Fannie Mae