Last month in our Vice Index update, we noted the following:
The Vice Index points to continued consumer strength through 3Q.
The Vice Index is doubling down on consumer strength. While it shows a slight dip year-over-year for June, that’s because last year’s June was a strong base. The trend remains for strong, steady spending.
Trucking Demand and Vice Spending
Strong trucking demand backs up the trends in the Vice Index.
Trucking is the immediate precursor to retail spending. Goods shipped via truck are weeks – if not days – away from being sold to consumers. June trucking demand was even higher than May and the strongest in nine months.
Better still, the demand surge began early in the month, so it was separate from July 4th stocking. It means that stores are responding to strong customer foot traffic, and a lot of the goods being trucked around are for restaurants and bars, which brings us to what is and isn’t included in retail spending.
Experiences and Vice Spending
When it comes to spending on experiences, the only component incorporated into retail sales is food services and drinking. That just continues to overshadow all other areas of retail because the consumer is ready to play.
The US Consumer Steps Out
The US consumer has:
- An enormous amount of disposable income.
- The willingness to spend it.
- A focus on recreation and entertainment. Unfortunately retail metrics do a lousy job of capturing spending on recreation.
Consider the recent boxing match in May between Floyd Mayweather and Manny Pacquiao.
- Pay Per View revenues hit 0M, up from the previous record of 0M set in 2007 when Mayweather fought De La Hoya. Bars were paying nearly 00 apiece to show the event precisely because they expected to have a lot of patrons out drinking and playing. Recall the chart above showing the boom in drinking at bars and restaurants. Covering that cost means selling a lot of beer, and anticipating a lot of customers with money in their pockets.
- 4.4M people paid to watch the fight compared to the previous record of 2.45M in 2007, almost double. It’s a measure of how much money Americans are willing to spend to be entertained: 0 to watch a boxing match on TV.
- Ticket prices were through the roof. The cheapest seat was ,500. It would have cost you ,000 to sit ringside. Ticket sales hit M, smashing through the previous record in 2013 of M.
That’s hot money, and a lot of it. Believe it or not, none of it gets measured by retail spending. Nearly a billion dollars spent in one night on a boxing match, and none of it will get included in the retail figures.
Vices Personify the Economy in Real Time
Have money, will vice. It’s as simple as that.
Gambling is a prime example of vices marching in tandem with the broader economy. Compare US GDP and Atlantic City gambling revenues. The coincident quality of gambling is obvious. That’s because gambling is a cash-based activity, and specifically free cash. That means gambling is affected by the same factors that drive personal consumption expenditures, and by extension the GDP.
Note that the Zero Interest-Rate Policy and Quantitative Easing turbo-charged gambling revenue in Atlantic City. Proximity to Wall Street made Atlantic City the casino-to-the-casino, but the end of QE has ended that run.
Gambling works as a window into today’s economy because of its broad and deep appeal. It covers virtually every demographic. Every year tens of millions of gamblers indulge.
It’s also very much a practical guide for investing.
Why Investors Should Care?
Gambling leads interest rates and the equity market by 1-2 years!
According to the slowdown in gambling revenues, the Fed is far behind the curve in raising rates. In fact, the Fed would normally be cutting rates at this point!
Additionally, the stock market should be headed for ~0% growth in 2015. Really makes you think…
Middle American Gambling and Today’s Economy
I just spent July 4th weekend in Las Vegas. It was packed.
Crowds milled around the strip even in the desert heat. In typical Vegas spectacle fashion, fireworks went for two nights. My casual observation was that most folks were American and specifically Middle American. Families came on vacation – the pools were crowded with kids. (There was in fact a Caddyshack moment where the pool had to be evacuated.)
Las Vegas being a vacation destination is a key reason to focus on other gambling hot spots like Atlantic City. Vegas includes foreign tourists and business convention attendees – not exactly the pure snapshot of Middle America that we want, like the types you see in Detroit casinos
Vegas is also remote from population centers. If someone has 0 burning a hole in their pocket and they want to gamble on a whim, they can do that if they live in and around Ohio, Maryland, Florida, Louisiana, Detroit, Connecticut, Pennsylvania and Atlantic City. That’s where locals can enjoy drive-by casinos.
We know for sure that Middle America loves to gamble.
- Maryland: One new casino in 2014 boosted state gambling revenue 30% (+0M).
- Ohio: Four new casinos in 2013 and three in 2014 boosted state gambling revenue 50%+ (0M).
In 2014, US total casino gambling revenue hit .8B, up from .9B last year.
More recently, gambling data remains mostly positive. Our preferred cross-section of Middle American gambling includes Detroit, Connecticut, Pennsylvania and Atlantic City.
Together they account for 55% of all US gambling revenue.
Since Middle American gambling is very sensitive to real-time economics, it is a proxy for consumer spending. For example, revenues surged late last year as the gas pump dividend sank in. They also plunged early this year as storms cut the means and opportunity to vice. (Yes, we are turning the noun into a catch-all verb: He vices, she vices, we all vice.)
As goes gambling, so goes the American economy, and right now it is saying that consumer spending continues… for now.
Related podcast interview:
Moneyball Economics’ Andrew Zatlin: Vice Index Offers Inside Look at the U.S. Economy
