Consumer spends less due to inflation and economic concerns

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More Americans are starting to back off booking flights, hairdressing, building backyard pools, and replacing old leaky roofs — in some new indication that the consumer engine of American economic growth may be losing steam.

Over the past several weeks, households have already cut back on big ticket purchases due to price hikes, but in a worrying development, data shows that consumers are also beginning to hit the brakes when dining out, vacation plans and even routine services like manicures, haircuts and cleaning appointments. household. Business owners across the country say rising prices, dwindling savings and concerns about the sagging economy are negatively impacting household spending decisions.

At Olentangy Maids in Columbus, Ohio, more customers are delaying or canceling house cleaning appointments. Some regular customers are trying to negotiate lower rates, while others have stopped tipping altogether, said Keith Troyer, co-owner.

“It wasn’t a huge drop, but it was just noticeable,” Troyer said. “Quite a few clients called saying, ‘Hey, my wife has been laid off. We need to cancel,’ or ‘Can I switch from semimonthly to monthly?’ Before this month, that didn’t happen often.”

Consumer spending, which makes up more than two-thirds of the US economy, maintained its strength through April even as inflation soared to record levels. But there are growing signs that the spending line may be ending.

Retail sales slowed last month for the first time this year, driven by a 4 percent drop in auto sales. US flight reservations It fell 2.3 percent In May of the previous month, according to data from Adobe Analytics. And both high- and low-income Americans have started to slip, particularly in terms of services, in the past four to six weeks, according to an analysis of credit card data by Barclays. The bank found that the slowdown in spending is now centered on services, not goods, 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. Indeed, that narrative has been true for most of this year. But… it seems that spending on services is slowing down considerably.”

According to a Barclays analysis, spending on services such as travel and restaurants, which grew more than 30 percent from 2021 rates this year, has slowed to half that pace.

Customers at Salon Simis in Fairfax, Virginia, began cutting expenses in new ways. Malik Ahmed Sim said clients who used to come every four weeks now go 12 weeks between appointments. Others negotiate lower rates or opt for partial treatments instead of highlights all over. Overall sales are down 20 percent from last year. Average tips have also fallen, from about 20 percent to 10 percent.

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

He said he’s trying to work with them Using low-priced color streaks or passing hair-drying services on to less experienced stylists. But he’s feeling inflationary, too: The value of disposable glove boxes has 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 worries that another price increase will alienate more customers.

“People are going back and forth,” he said. “They’re saying, ‘I’m sorry. I can’t stand this anymore.'”

These early signs of a slowdown across a wide range of products and industries, including travel and restaurants, challenge the idea that Americans have simply shifted their spending From goods to services. The hope so far has been that after two years of stockpiling products like cars, furniture, and appliances, Americans will splurge more on vacations, dining out, manicures, and other services they mostly prefer. Postponing much of the epidemic.

Meanwhile, a benchmark index showed growth in the US service industry slowed in May to its lowest level since February 2021, according to a closely watched index from Institute of Supply Management.

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‘Merchandise side [of spending] “Restaurant sales are down, travel-related spending has gone down. The burden on the consumer has become too great – whether from inflation or other factors – across income groups,” said Kevin Gordon, senior director of investment research at Charles Schwab.

In general, searches for flights in the booking site kayak An average of 13 percent is down so far this month, compared to the same period before the pandemic in 2019. Meanwhile, restaurant dining data from booking platform Open Table shows that more people are eating out at restaurants. decreased by 11 percent In the week ending June 16, compared to the same week in 2019.

Gordon said that while low-income families are hardest hit by inflation, higher-income families are starting to downsize, especially as they watch investments — from portfolios to stocks — lose value. Federal Reserve data showed household wealth declined for the first time in two years in the last quarter, due in large part to a $3 trillion drop in stock values.

Markets extended their choppy decline this week, with three major stock indexes deepening their losses for the year, and the S&P 500 closing out its worst week since March 2020.

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At Posh Luxury Imports, a Los Angeles auto dealership that also rents luxury cars, owner Omar McGee said consumer demand and credit scores are significantly lower than six weeks ago.

“I’m seeing more credit problems,” McGee said. “More people are maxing out cards or defaulting on payments. Ultimately, this means people have to be more careful about their spending.”

Credit card debt, which has fallen during the pandemic as Americans have used government stimulus to pay off balances, has rebounded to Its all-time high. As of June 1, Americans had $868 billion in consumer debt, up about 16 percent from a year ago, according to Federal Reserve data.

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And while the rich continue to rent Lamborghini and Bentley cars, McGee said there has been a marked decline in the number of tourists choosing luxury rentals.

“I can tell that travel has gone down, tourism has gone down,” he said. “A lot of upper-middle-class customers are used to coming into town and showing off, but you can see that drop dramatically.”

Consumer hesitation comes on the heels of months of inflation at 40-year highs. Prices have risen 8.6 percent in the past year, driving up costs for a range of necessities, including gas, which have reached a record high. $5 per gallon.

The biggest bright spot in the economy remains the robust job market, with the unemployment rate hitting a pandemic low of 3.6 percent. Demand for workers approached record levels in April, with about Double the number of opportunities available to job seekers. Weekly unemployment insurance claims started recently Risesbut it is much lower than during most of the pandemic.

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With workers still able to find jobs, the Fed took a sharper step this week to raise interest rates by three-quarters of a percentage point in the hope of calming the economy enough to curb inflation without pushing it into recession. Despite assurances from the central bank that it can achieve a “soft landing,” businesses and households are increasingly concerned about the state of the economy as well as personal finances. In fact, consumer sentiment in the United States slumped this month to an all-time low, according to an index released by the University of Michigan.

Markets and households are losing confidence in the Fed’s ability to handle inflation

“The consumer is under pressure,” said Douglas Duncan, chief economist at mortgage giant Fannie Mae, who expects a recession next year. We see this in lower retail sales and increased use of credit cards. But we don’t expect things to collapse right away. It will be a slower decline.”

In fact, small businesses across the country are reporting small signs of customers falling back. Morehead Pools, which specializes in luxury backyard pools in Louisiana, are booked this coming summer, CEO Michael Moore said. But in a sign that higher-income consumers may think twice before profligating, new queries are down 30 percent so far this year.

“Once you get over $4 [per gallon of gas]“The cost of energy, inflation and then the cost of money … that will really dampen demand in our sector,” Moore said on an analyst call hosted by Jefferies this week.

Noffke Roofing in Mecon, Wisconsin, has seen voracious demand during the pandemic. But recently, economic tensions have prompted many customers to repair rather than replace their rooftops. Many also trade in cheaper materials, such as asphalt shingles instead of cedar.

“We are certainly beginning to see a pause,” said President Ben Nowke. “Customers say, ‘I know it’s time to get a new roof, but can we get more time out of that roof? “They think about their budgets a lot.”