The Vice Index indicates a sharp downturn in retail spending… beginning in the fourth quarter (October.)
Regular Moneyball readers know the Vice Index is the best way to gauge the American consumer. It’s proprietary research I conduct to track discretionary spending in real-time.
And the Vice Index is telling us that retail spending is about to drop off sharply. That’s only likely if wage growth slows sharply. After all, retail spending is determined mostly by wage growth (You can see how retail spending is positively correlated with wages.)
Wage growth is currently at 4.4%. Could it drop a full 1% or more (economists measure increases or decreases in terms of basis points. 100 basis points = 1%)?
It just did.
Compensation dropped 80 basis points (0.8%) in the last three months alone. It dropped from 5.2% in March to just 4.4% in May.
And the biggest driver of wage growth – payroll growth – is slowing. Whether the second half payrolls of 2016 averages 200,000 per month or a more likely 150,000 per month… it means the same: significantly slower growth.
Slower payroll growth means slower wage growth.
To underscore our point, Moneyball Economics S&P 500 hiring data shows sharp drops in hiring by consumer services and consumer goods companies. These industries know growth is slowing.
And the Vice Index is reflecting what consumers are already sensing… that the economy has peaked. And it’s time to prepare for rainier days.
The Business Cycle
The business cycle is actually pretty basic.
As money flows into the economy, businesses will hire more and invest more. That kicks off a virtuous cycle where more business investment leads to more spending which leads to more growth. There are a lot of ways to get money to flow. The traditional way is through hiring: that boosts the aggregate level of wages. If there are no other sources of money, then spending has a ceiling established by incomes.
Starting in the 90s, the government found ways to expand the money supply.
First came the 401K. This mechanism offered employees a pension-type savings account wherein tax benefits encouraged them to save into a 401K. Companies also topped off the savings under various matching grants. Bottom line: money flowed to the stock market. A wealth effect began. That’s a huge part of what enabled the “Dotcom” boom and the silly stock valuations.
Another way to boost the money supply is debt.
Following the “Dotcom” bust in 2001, Alan Greenspan as the Fed Chairman created a regime of cheap money. People borrowed and spent. Until the whole thing collapsed.
Without access to debt, the economy shrank because people had to live within their incomes. (And the aggregate income level shrank because of huge layoffs.)
People didn’t learn. The credit bubble is back and even worse.
Credit Bubble Burst 2.0: Another House of Cards
There are two types of debt: the kind that gets paid soon (revolving credit) and the kind that lasts for years (non-revolving credit).
Revolving credit is essentially credit cards. Non-revolving are home loans, auto loans, and student loans.
Household credit card debt (consumer revolving credit) is back to pre-Recession levels. (Note: credit card debt soared in the recession partly because banks dropped rates and people spent like mad, and partly because people had no money and used credit cards to get by.)
More frightening: non-revolving credit has doubled since the recession.
The first concern is size: it is almost three times the size of the revolving debt. The second is that the quality is terrible. Remember that the entire house of cards collapsed last time because of subprime lending aka bad quality lending. Well, it’s going on again. Auto loans are defaulting fast and the quality has dropped.
Here’s the real dirty secret: student loans. Student loans are almost as big as credit card debt. It has grown trillion since the recession in 2009.
The problem is that it’s not earmarked for tuition. That trillion has been going to…cars and other spending areas.
In other words, we now have an even bigger credit bubble underway and with the same level of poorly qualified loans. Our entire economy is built again on a massive wave of debt.
And the peak has been reached. As spending growth slows, companies slow hiring. That virtuous cycle turns into a vicious cycle of less hiring, less spending, and then layoffs.
Leveraging the Economic Signals from AirBnb, Uber, and Prostitution
There is nothing new under the sun.
What do I mean? To be honest, AirBnb and Uber are one step up from being gimmicks.
Let me explain.
They didn’t create the products they sell. For eons, people have been renting rooms in their homes or offering rides. They didn’t create the software. Their digital marketplaces are combining pre-existing standard software utilities.
What they are bringing to the table is that they are applying digital tools to pre-existing pockets of the underground economy and that’s allowing for consolidation and streamlining
The same is true of prostitution. It’s been around for thousands of years. And has moved online to achieve the same objectives as Uber and AirBnb. To broaden the customer base and enable peer-to-peer (P2P) communication, security, and payments.
The common thread across these businesses is that they convert a personal asset (houses for AirBnb, cars for Uber). With prostitution, the asset doesn’t get any more personal.
Meanwhile, by streamlining the process, AirBnb and Uber have expanded the business by making it easier for buyer and sellers to join. After all, flexibility is the selling point of the on-demand economy. That’s an important common point shared by the three businesses. Most service providers participate on a part-time basis as a means of augmenting income.
A major website for escorting is SeekingArrangement.com (SA.) Technically it’s a dating website and not an escort service… but functionally it is an escort service. It specializes in helping women find men to pay them “allowances” in return for “companionship.”
And like Uber and Airbnb, SA has created an exchange platform that provides communication, security, and breadth. In SA’s case, college students are a major source of supply.
Which all goes back to the appeal of the on-demand (or gig) economy: Flexibility, part-time work, and safety.
The point: These businesses qualify as key consumer spending indicators for several reasons.
- Users are typically individual consumers
- Breadth of coverage: Uber provides 1 million drivers per day. AirBnb will book 79 million room nights this year. And SA has over 5 million users
- Consumer-centric spending: These are typically forms of luxury spending (Although Uber slightly less so.)
Cyclical, Counter-Cyclical, or Both?
It’s too early to use Uber and AirBnb as economic data points.
For starters, they are still growing their user bases. Secondly, we haven’t seen their behavior for a full business cycle.
It’s also not clear if they are cyclical, counter-cyclical, or both. For example, when times are tough and income needs boosting, more people resort to offering escort services (supply increases.)
Uber and AirBnb will likely behave the same way.
More rooms and drivers will become available. Especially drivers because people out of work also have the time to drive. Like escorting, supply increases as people do what they need to in order to stay afloat.
But they may be counter-cyclical to some degree.
Escorting also sees supply increases during boom times. Demand surges. Prices rise. And there are more opportunities to increase incomes.
The same can be AirBnb. Personally, I know several examples of individuals buying properties specifically to target the AirBnb traveler.
Without the extra income, they couldn’t meet the cash flow. This means supply growth is speculative and stems from boom times.
Follow the Pricing
Supply is not always driven by demand… but prices are.
In 2014, The Economist analyzed data from an unnamed, but well-known escort website.
They found that rates varied greatly depending on the city. But they couldn’t explain why. After all, bigger cities will have more escorts… and more supply means more competition.
The answer may be simple.
Hotel Room Rates
- The low-end: Tokyo. Hotel costs are relatively small. It’s easy in Japan to rent rooms by the hour. (They are called Love Hotels.)
- The high-end: San Francisco. San Fran hotels are limited and very expensive.
I conducted a survey of escorts at the beginning of the year. Prices had recently been raised to offset higher hotel room rates. But, in general, further hikes weren’t expected.
Prices Also Point to Consumer Demand Issues
In the first quarter (Q1), I reported that prices were moving up again. And not necessarily for margin management reasons. But for opportunistic reasons.
Higher-end escorts were raising prices because they could. They raised prices in response to market forces. Demand was strong enough to absorb higher prices. Most importantly, the price hikes have held.
However, Recent Signs Show That Escort Business May Be Stalling
Business remains strong heading into the second half of the year. There are no discussions in various chat rooms and boards about slowing business conditions. (There are discussions about using AirBnb as an alternative way to paying high hotel prices. But that’s basic business practice. And another example of the ways in which the sex industry always seems to leverage the latest technology.)
But there are signs that escorts are having to drum up business more than usual.
One example is the emergence of new special services… like cuddling. Another is for the escorts to travel to other cities for business.
This is usually a big warning sign. Why? Because travel costs eat into their profits.
KEY TAKEAWAY: Overall, there is nothing definitive. Just some interesting anecdotes. But they do all seem to trace back to stagnant business growth.