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Spending on services is starting to taper off, U.S. data indicates

Justin Ho Jan 27, 2023
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While consumer appetite to travel remains strong, more people are opting to drive rather than fly. Joe Raedle/Getty Images

Spending on services is starting to taper off, U.S. data indicates

Justin Ho Jan 27, 2023
Heard on:
While consumer appetite to travel remains strong, more people are opting to drive rather than fly. Joe Raedle/Getty Images
HTML EMBED:
COPY

Consumers have been spending less on goods and more on services for a while now. That shift in spending is responsible for a lot of the inflation we’ve been seeing in the services sector.

But on Friday, the Commerce Department reported that when you account for inflation, services spending was flat in December. Spending at restaurants fell. All that spending on services we’ve been doing may actually be starting to cool off.

​Restaurant spending is a category that Jennifer Lee, senior economist at BMO Capital Markets, keeps an eye on. It’s an indicator of how consumers feel, she said.

“That is probably one of the first places to get cut back when times are getting tougher,” she said.

People have also been cutting back on other types of discretionary spending, according to Kayla Bruun, economic analyst at Morning Consult.

Spending on movies, sporting events and other types of recreation has come down, she said. Travel spending is still growing, but people haven’t been flying as much.

“Consumers are still taking those trips, but they’re doing ones that are maybe within driving distance, taking advantage of those lower gas prices, compared to earlier in the year,” Bruun said.

Meanwhile, prices for a lot of services have already started to moderate.

Airfare prices have dropped, thanks in part to declining fuel prices, said Michelle Meyer, chief economist for North America at the Mastercard Economics Institute.

“And then restaurants — you’re seeing some moderation in the rate of inflation there, although certainly not a decline just yet,” she said.

If demand for services continues to slow down, companies in the services sector might ease up on their hiring plans.

That’s not such a bad thing, said Menzie Chinn, an economics professor at the University of Wisconsin.

“To the extent that there’s still many job openings relative to people willing to take those jobs, then we do want to see some reduction in demand for labor,” he said.

That could take pressure off wage growth and further slow down inflation, Chinn added, which is exactly what the Federal Reserve is trying to do.

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