What do escorts and McDonald’s have in common? Both are responding to the end of economic growth, says Andrew Zatlin of Moneyball Economics.
When times get tough and people are less willing to part with their money, businesses get creative. Zatlin tracks consumer spending and business trends not just in food and dining, but also on economically-sensitive vices—alcohol, gambling, escorts, and the like—and says a pattern is emerging: “organic business growth has stopped and new approaches are needed,” he writes.
In this case, after seeing sales decline for multiple quarters, fast-food giant McDonald’s decided to reach out to new customers by launching an all-day breakfast menu, which generally sells at lower prices than non-breakfast food items.
Like any other business facing a protracted decline in sales, escorts have taken a similar approach by expanding their menu to a larger array of discount items—in this case, by offering "professional cudding."
It’s all about packaging and positioning, says Zatlin. Organic growth just isn’t there anymore so businesses across the board are resorting to new marketing fads, discounts, extra services, or whatever they need to do in order to maintain revenues, which are increasingly coming under pressure.
Here’s what Zatlin told Financial Sense in a recent podcast:
“At the end of the day, as consumers, we've bought all the cars we're going to buy; we've bought all the TVs; we can only see so many movies; we can only go out for so many steak dinners in a week. We've maxed out and the demand has been saturated—there's no more real growth and that's starting to trickle in as we listen to earnings calls since revenues have plateaued.
Eventually, this starts to trickle down to the consumer...[and] that will probably be, at least according to my vice index, a September-November type of event where all of a sudden we're going to start to see the consumer pull back, retreat a little bit...with real hits to the pocketbooks in the second half and that's going to be a cold shower…
Business fundamentals are not strong and they're certainly not strong enough to keep this market up and the stock market is just waiting for the next shoe to drop."
Scroll down to read more of his comments, or click to hear a preview of his interview below. Subscribers can access the full audio by clicking here or via podcast on their mobile device.
Tell us about your "Vice Index", what it tracks, and it's accuracy as a leading indicator for consumer spending?
"I track spending on gambling, prostitution—like you said, booze, broads, blackjack, and bong hits (marijuana). The reason I track that is because, for one, I can. There's a lot of historical data. But the other reason is when you start going and drilling into the details there's one thing that stands out—it's an all-cash business and that's key...
If someone is going to go out and spend a day or two of wages...then what you are seeing is that they really feel good about today and they really feel good about tomorrow and they've got the money in their pocket—it's all cash. So, it's a very economically-sensitive barometer. So, luxury spending—everyone will accept that luxury spending is really important to watch but the problem is how do you track it? I'm tracking it by looking at our vice spending, and it has been telling me a lot of good information.
It leads consumer spending by a few months...and I translate it into a retail forecast where I consistently beat consensus on what's going on with consumer spending in the retail market. But, in essence, it's basically tracking human behavior at a very simple level. We all have our ideas about what luxury is—I simply use forms that cut across every socioeconomic demographic out there...and I'm leveraging that data the way it should be leveraged to tell us what's really going on with the consumer."
What is your Vice Index currently telling you about the economy?
"Right now it's saying steady as you go for a couple of months and then when we come out of the summertime, it looks like there's going to be some belt-tightening that's going to happen.
Let's talk about what's happening with household finances as we go through the summer. Right now we've gone through a period where our 401ks have been up-down, kind of moving just sideways really for all intents and purposes. There's a lot of nervousness in the market right now but this is all 401k stuff. This isn't affecting my paycheck right now. Fast forward a couple of months from now and then we've got some real hits to the paycheck.
I don't know if folks are already seeing their health care rates for 2017 but the speculation right now that's coming out is we're looking at a 15-20% rate hike. That's a real hit to the pocketbook! Meanwhile, as those costs are going up, we're now seeing inflation going up again...and folks are going to start to see that over the summer...and so with my Vice Index, people are starting to be aware of this now up to a point and so there's a slight retreat in vice spending."