Service Sector Slows: Sign of the Times as Consumers Shift Spending?

shopkeeper on phone

The latest ISM Services PMI reading came in at 51.8 in October, down from a 53.6 reading in September.

A reading above 50 notes expansion — but the expansion is slowing, and the latest tally missed a consensus estimate of 53.

The Index measures the prices, inventory, employment and other indicators of economic growth in the non-manufacturing sector, with input from managers in the arts, entertainment, recreation, real estate, rental and other industries.

The October report showed that prices are still rising, albeit at a slower pace and the “Inventories Index” showed a contraction, at 49.5%, down from September’s 54.2%.

“The 12 services industries reporting growth in October — listed in order — are: Arts, Entertainment & Recreation; Retail Trade; Other Services,” noted the release that accompanied the ISM data. Segments that saw a decline in October included, among others, “Real Estate, Rental & Leasing.”

The ISM Services PMI details dovetail with the continuing slew of earnings reports that show a shift in recent quarters to travel and leisure and experiences. As discussed here, Visa’s latest results included the fact that spending on cross-border travel was up 26%. American Express spotlighted 13% growth in spending on travel and entertainment.

Where There Might be Headwinds

But there are hints of headwinds — not declines, but slowdowns to what has been a long period of significant growth, of consumer enthusiasm to get out and about (and use cards to do so). Consider the fact that Mastercard’s management observed late last month that consumer spending had been decelerating in the wake of the September quarter’s end and into October. Booking Holdings, which reported results this week, said that in the third quarter, traveler customers booked 276 million room nights, up 15%. Management stated on the conference call that October room booking growth was about 8%, tied in part to the war in the Middle East and some cancellations in the region and abroad. And in looking at the fourth quarter, management expects gross bookings to grow by about 5%.

Holiday travel plans may be largely booked, but the question remains as to what happens next. PYMNTS Intelligence data has delved into the stresses and the stressors of spending through the next few months. And since two-thirds of consumers have indicated that they see the holiday season as among the most financially challenging periods of the year — with 26% pointing to vacation costs as a key contributor to their financial stress — the spending on experiences may have gotten its most outsized surge for 2023. Fully 55% of consumers facing seasonal swings in financial standing have cited events and celebrations as a reason for seasonal financial distress. And in the meantime, gift giving still is top of mind (spending at retailers still remains high). As 2023 give way to 2024, services and leisure-related spending may see further deceleration.