Business has been so slow at the Corner Bar & Diner that many nights, owner Serena Rice closes her New Underwood, S.D., watering hole at 8 p.m., six hours early. Fewer people are stopping in — and when they do, they’re ordering $3 well whiskeys instead of their usual $5 pours of Crown Royal.
Rice has taken pricier items like steak and ahi tuna off the menu. Now she mostly serves frozen foods — mini corn dogs, chicken strips, breaded pickles — that won’t go bad if customers don’t show up.
“Everybody that comes to my place is in the same boat: Costs are high and they don’t know how they’re going to get by anymore,” Rice said. “People are broke. It’s cheaper just to stay home.”
Across the country, there are signs that Americans are pulling back on restaurant outings, hotel stays and airline tickets, after months of exuberant consumption. Spending on a range of services, including international travel, taxi rides and clothing alterations, fell in April for this first time this year, according to federal data. People are also spending less on public transportation, child care and funerals.
An emerging pullback would be welcome news for the Federal Reserve, which has been taking aggressive steps for over a year to slow the economy enough to bring down inflation. Much of that fight has been focused on curbing persistent price growth in services such as travel, transportation and restaurants.
The central bank, which has raised borrowing costs by more than 5 percent, is widely expected to pause its aggressive interest-rate hikes when it meets Tuesday and Wednesday. Analysts expect the Fed to hold rates steady for the first time since March 2022.
The potential for slowing demand to continue to bring down prices may help determine whether the Fed resumes interest rate hikes in July and beyond. Although overall spending on services rose in April, by 0.3 percent, that growth was smaller than the 0.8 percent increase in spending on goods.
“Things are coming down from the incredible pace we had seen, but is it enough to derail service-sector inflation?” said Diane Swonk, chief economist at KPMG. “That’s the big question. So far we have not seen that happen, but that is what the Fed would welcome with open arms.”
The Fed began rapidly raising interest rates early last year, in hopes that higher borrowing costs would deter customers and businesses from spending so heavily. The idea was that lower demand would eventually translate to lower prices,controlling the steep increases that drove inflation last year.
Until recently, though, higher borrowing rates have had little effect on consumer spending. Many Americans still have extra savings left from covid-era government stimulus checks or from not spending as much on services during the worst of the pandemic, which has allowed them to keep paying for big-ticket items such as cars, as well as travel and entertainment, even as prices continue to climb.
But now, the economy appears to be approaching a turning point. Some of the country’s largest service providers are reporting dampening demand: OpenTable data shows fewer people are dining out. Airbnb expects bookings growth to slow and average daily rates to fall this quarter compared with last year, as people opt for cheaper lodging than they did a year ago. And at McDonald’s, executives say customers are increasingly forgoing fries with their meals.
“We are seeing a broadening economic slowdown,” said Lydia Boussour, senior economist at EY-Parthenon. “It started with the housing sector, then manufacturing. And now we’re seeing service activity stalling.”
That slowdown in spending, she said, is likely to accelerate enough to contribute to a “modest” recession later this year.
Inflation has been a key challenge for policymakers in the aftermath of the pandemic. A combination of surging demand, thanks to extra savings and government stimulus money, plus supply chain hiccups and labor shortages led to a rapid run-up in prices. Inflation peaked at 9.1 percent in summer 2022 — the highest reading in more than 40 years — but has moderated since then, falling to 4.9 percent in April. New inflation figures, to be released Tuesday by the Bureau of Labor Statistics, will offer an updated snapshot.
In the meantime, Americans appear to be optimistic that inflation is easing. Data from the New York Fed’s Survey of Consumer Expectations shows that consumers expect inflation to be about 4.4 percent a year from now, down from an expectation of 4.7 percent in March.
The hope, economists say, is that slowing demand will continue to bring down inflation across the economy, without tipping it into recession.
Madison Sasser, 24, who until last month worked at Outback Steakhouse in Tampa, is now a server at another national restaurant chain. Most evenings, she says she leaves her five-hour shift with less than $100 in tips, down from $130 a few months ago.
“It’s been a lot slower than usual,” she said. “Our winter busy season wasn’t as busy. March was really slow, April and May were really slow. And now June is even slower.”
However, economists stress that the path ahead remains uncertain. Many are forecasting at least a mild recession later this year, even though the economy has so far proved incredibly resilient. Companies are still hiring at a brisk pace, which means many families can afford to keep spending.
But at the same time, more Americans are taking on credit card debt and other loans to cover everyday costs. There are also large differences by income group: Wealthier families, who were able to squirrel away money during the pandemic and have benefited from soaring home values and stock portfolios, have continued to spend heavily, obscuring slowdowns among lower-income groups.
At Bluetail Travel, a high-end agency in Arlington, Va., for example, demand for luxury river cruises remains brisk. Regulars are locking in dates for 2024 and 2025, even as they balk at higher prices.
“There’s some sticker shock, but people are still trying to make it work,” owner Christina Schlegel said. “They’re saying, ‘Instead of a five-star hotel, maybe we can do a four-star boutique.’ But they’re still spending.”
Overall, though, demand for hotel rooms has fallen for two months in a row and is below 2019 levels, according to the U.S. Travel Association. Meanwhile, Americans spent less on air travel and took fewer flights, both domestically and internationally, in April than they did in March, according to the Airlines Reporting Corp.
Although the slowdown has so far been gradual, many in the industry expect the trend to pick up later this year — and they’readjusting hiring plans and investments accordingly. Leisure and hospitality companies posted nearly 100,000 fewer jobs in April than they did in March, even as job openings ticked up across the economy.
Geoffrey Jaime, an Airbnb host in California, says demand for his six apartments in the San Bernardino Mountains has fallen sharply, as fewer travelers venture to the area. He’s lowered prices by 22 percent, from about $500 a week to $388, and has started advertising on other sites. Still, it’s been tough to make up for the loss in bookings that began in March 2022 and intensified this year.
“There’s been a definite drop-off,” he said. “Two, three years ago, the market was on fire. People had unemployment money, there was stimulus money going around. I remember thinking, ‘This business is incredible.’ But now it’s just completely flattened.”
Debbie Milner, who owns a dog-grooming business in Jacksonville, Ark., says business never really picked up after the pandemic. But in recent weeks, things have “rolled even more downhill.”
She grooms about a dozen dogs a day, down from 40 to 60 a few years ago. Many of her regulars are strapped for cash, which means they’re coming in far less frequently than they used to. Meanwhile, with costs going up, Milner this year raised prices by $3 per service. (Grooming a small dog starts at about $45, she said.)
“People that were coming in every six weeks are now here every five months,” said Milner, who started Debbie’s Wagging Tails Grooming about 20 years ago. “Everyone’s tight on money, and it’s like things just went kaput.”