Vice Spending Accelerates Slightly
In the eyes of consumers, everything is awesome.
Read Wantrobski: Markets Unprepared for 'Explosive' Economic Growth
The stock market has rebounded in full and distant threats to disposable income (slowing wage growth, rising inflation, end of gas price-dividend) are exactly that, distant. Today’s consumers are not worried about tomorrow… yet.
So there is no reason to throttle back on spending, which means retail spending will continue to pace wage growth, with some boost from an early Easter and Spring Break.
Other boosts to retail spending include, sadly, terrorism. It was reported that more Britons holidayed in the US this year instead of favored destinations like Egypt, Spain, and Turkey because of fears of terrorism.
March retail spending is not at risk. Wage growth is slowing. Private payroll growth has been less than 200K for two of the last three months, and the quality of those jobs is problematic. The economy is adding an hour bartenders, and cutting an hour industrial jobs. In the face of slower wage growth, even slight upticks in inflation will have an outsized bite. By the end of summer, the benefits of gas price deflation will have run its course and healthcare inflation will continue to gallop ahead. Oh yes, healthcare inflation will likely accelerate again in the 2H as insurers boost rates again. United Healthcare (NYSE: UNH) fired the first shot across the bow this week in its announcement that it is exiting Obamacare in Arkansas and Georgia. Aetna (NYSE: AET) also says that it’s losing money on Obamacare. Rate hikes are coming, and it puts a squeeze on the disposable income which would otherwise end up as retail sales.
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Indeed, disposable income is slowing. It’s still strong, but down significantly from 2015 levels. The two problems to watch are the end of commodity disinflation and knock-on effects of the industrial recession.
Gambling Jumps in February
Gambling has been very strong.
Retail sales tell only a portion of the consumer spending story. They exclude the massive tourism and recreation industry. Everything from sports and movies to hotels, air travel, and all manner of recreation in general gets excluded. When Hotels in Cancun were completely sold out over the winter holidays (the Governor of the State of Quintana Roo basically alerted tourists not to bother trying to visit if they didn’t already have reservations), that was a sign of mammoth US consumer spending, but none of it registered in the retail figures. Vice spending is the tip of that mad money spending. Gambling, in particular provides additional insight into the availability of money burning a hole in peoples’ pockets, which is the leading indicator of the ability and propensity of US consumers to spend.
Gambling was hot in February. From foot traffic to money wagered to spending on room-service, US consumers were out in force. Weather certainly helped: Las Vegas was in the 70s all month and New Orleans was sunny and pleasant.
That spending desire carried through into March.
Restaurant Sales Jump
Although retail sales figures largely ignore recreational spending, the one area of overlap is food services and drinking.
Beginning in early 2015, food service spending growth has been steadily slowing, falling almost by 50%. Suddenly, that trajectory has reversed and sales growth is accelerating. Per the National Restaurant Association, sales expectations started to rise in January and accelerated further in February. Following that trend, food service sales growth jumped in February. Based on the NRA’s Same Store Sales Expectations, look for that momentum to continue in March.
On a related note, alcohol consumption is improving. Throughout 2015, American on premise (i.e. bars and restaurants) consumption of alcohol fell (measured in units not $). While consumption continues to contract, it’s doing so at a slower rate. (No, it’s not because of competition from recreational marijuana, which coincidentally legalized around the same time.)
The Eye of the Hurricane
Things are going to get a little worse from here on out. The amount of money available to spend on consumer items is already waning from the combination of slower wage growth (fewer new jobs, lower raises) and higher cost of living (more inflation, less disinflation). The stock market will show ugly earnings as companies fail to find revenue growth and are forced to cut back on spending.
Right now consumers feel great and companies are feeling bad. By the summer, the corporate malaise will hit consumers. Expect central banks to do their best to prop up the markets, but at some point it’s just putting lipstick on a pig and the markets will tumble. Look for that in about six months.
