Risk Rising for 4Q Retail Spending
- Q3: Nominal spending remains strong, growth set to slow
- Q4: Sharp slowdown indicated
Consumer Fatigue
Under market saturation conditions, consumer demands have been met.
That seems about right: we have hit peak auto sales (17M+), peak smartphone penetration (72% per Pew Research), and so on. Having bought all the stuff they need, US consumers are spending more on experiences.
Travel is a major form of spending on experiences.
Demand is at an all-time high: US hotel occupancy rates hit 67% last year. In the face of strong demand, hotel rates jumped 5%.
Retail data does not track recreation and travel spending.
Air fares, hotel rooms, gambling, and other forms of recreation are not included.
But slower growth is coming later this year.
The one place retail and play overlap is restaurant and bar spending, and, while that spending remains strong, growth is slowing. Again, market saturation. There is an upper limit to the number of nights people can go out, and that limit is being met. Restaurants can charge more money, but foot traffic is not rising.
Vice Spending: Growing Risk to 4Q Consumer Spending
Vice spending is also reflecting saturation. The latest data reflects a sudden downshift in growth. Again, consumers are still consuming, but they are not expanding their level of vicing.
Solid June Spending
June enjoys a few tailwinds. Father’s Day was a big spending event this year, and Memorial Day sales rolled a bit into June.
Approaching a Tipping Point?
The sudden contraction in vice spending is the concern. The last time vice spending dropped this far, this fast was in 3Q 2013. A few months later, retail sales dropped. Before that, a recession began.
It’s easy to understand why US consumers might be belt-tightening. Q2 has not been kind. Gas prices rose. 401Ks got blasted. Job growth slowed to a crawl.
While spending growth looks set to continue, the level of growth looks set to fall below expectations.
Casino Revenues Dip on Calendar Issues
The underlying gambling trends remain positive: more money is hitting the tables.
Gambling in May had a lot of headwinds.
First, there were fewer gambling days.
- May 2015: 10 weekend days
- May 2016: 9 weekend days
Second, Memorial Day came late in the month (Monday, May 30th). Gambling by any vacationers who stuck around a few days would have fallen into June.
Third, last year had the Mayweather-Pacquiao boxing match (a big driver of gambling). Nevada alone had ~0M in fight related bets. This year had nothing similar to boost the gambling.
Look past these year-over-year comp issues and gambling remains strong. In fact:
- Maryland gambling hit an all-time high.
- Atlantic City casino profits spiked.
Heading into June, all signs are that vicing continues unabated, which is a sign of household spending strength. That should trickle into retail spending.
Green Economy Continues to Bloom
In 2014, Colorado sold ~0M in legal recreational marijuana. Last year, .4B. This year through April: 0M.
Tax revenues have been equally flourishing: in the last four months, Colorado enjoyed M in sales tax receipts. That’s much more than alcohol tax receipts. Last year Colorado had .8B in tax revenues, of which __spamspan_img_placeholder__.13B came from cannabis sales (~5%).
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Every State would love a 5% boost to the tax revenues. It doesn’t stop there: cannabis tourism is big business, as is spending on accessories. Amsterdam is now in big trouble: Americans who used to flock there to smoke legal weed will find it much cheaper and possibly more fun to head to Colorado (popular pot tours now include a limo pick up from the airport, hit a cannabis club, and then the ski slopes).
Colorado has embraced the business and is promoting concerts and pot tourism. Notice the April surge in tax receipts. That’s because April 20th has become the de facto National Weed Day (420 is code for cannabis). Large concerts and events are popping up in various parts of the state. This is big business and it’s showing up prominently in the tax revenues.
Next up: Pot at Las Vegas Casinos
It’s well known that casinos provide free alcohol because drunk gamblers lose money fastest. Marijuana will probably be just as effective at separating gamblers from their money, but without the associated mess that comes from sloppy and often violent drunks.
(Of course, there are likely unintended consequences, like the extra cost at the buffets when stoned gamblers get the munchies.)
In November, Nevada votes on legalization for recreational use. Business is very much behind the move.
Slowing Growth Into Year-End
Vice spending is telling us that good times are still here, but it’s also signaling that we’re peaking. There is very little growth left and it’s likely that things will get a bit wobbly at year-end.
This means a lot of Central Bank intervention will come to prop up the markets.
I think we’ll see negative interest rates in the US by 2018. We say that it isn’t possible, but ever since the Fed broke all the rules and has been hell-bent on propping up the equity and real estate markets, there is no reason to say never. Plus the markets may force rates down to 0% sooner than you think.
I am liking bonds.
