As interest rate hikes continue to work through the economy, data suggest consumers are starting to think twice before opening their wallets.

Real growth in consumer spending has averaged a lofty 4% in the four quarters since the Bank of Canada began raising interest rates.

But recent Canadian debit and credit card spending has been flat, with a smoothed three-month average growth pace of only 0.1% in July, said a report from TD Economics on Wednesday.

TD said it expects consumer spending to trend lower in the medium term — an outlook based in part on slowing employment growth. TD also noted data showing weaker goods spending, which may persist.

For example, three-month average growth in spending on goods such as furniture and home electronics contracted the last five months, which aligns with weakness in retail sales data, the TD report said.

“These categories may have more downside potential as home sales are expected to remain under pressure for the rest of the year,” the report said.

Further, while spending on recreation and entertainment — Barbenheimer, anyone? — remains the largest catalyst of activity in services spending, its trend growth may be cresting, TD said. Along with transportation and travel, “higher price pressures might be the reason consumers are willing to hit a pause button on these activities,” the report said.

In the near term, spending on services could be boosted given that higher-income households still hold an estimated $140 billion in excess deposits, the report said.

And financial services (including broker-dealer receipts that respond to changes in securities markets) was one of two spending categories where growth remained positive, it said. (The other category was miscellaneous services, including those boosted by a return to the office, such as dry cleaning.)

But looking past the third quarter, TD said softer spending may be here to stay, given higher debt servicing costs, which will hit the 40% of households with mortgages in particular, as noted in a report earlier this month.

“An average household with debt will see a nearly $3,000 increase in yearly payment by the end of 2023 and more than $4,000 by the end of 2024,” TD said in the earlier report.

For the current quarter, TD forecast real consumer spending growth of 2% to 3%.