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Vice Index: January 2017

Vice Index: January 2017

Expect to see steady consumer spending.

The year-over-year (yr/yr) growth is accelerating  thanks to rising consumer sentiment and favorable comps.

Regular Moneyball readers know we look at the Vice Index to gauge how the economy is really doing along with consumer sentiment.

Moneyball’s Vice data tracks luxury spending by millions of Americans. It considers the millions of transactions by Americans each day.

The Vice Index tracks US consumer spending on alcohol, marijuana, prostitution and gambling.

Vices are a special form of discretionary spending that is highly sensitive to near- term economic conditions:

In other words, indulging in vices is not a casual event. Consumers have to have significant money burning a hole in their pocket and not have concerns about future demands on their cash.

Rather than follow these outdated models most use, the Vice Index is a much better looking glass into the heart of the American consumer.

EVERY American (across all socioeconomic and demographic groups) participates.

And right now… things are steady.

On a month-over-month (m/m) basis, retail (ex Autos & Gas) indicates 0.2%~0.3% average growth into Q1 2017.

But this is all based on lower interest rates – expect a down shift in spending on big ticket items like cars.

With regards to retail, vice spending typically leads basic retail spending by 4 months.

That advance visibility comes from the nature of luxury spending (it’s the 1st thing to be affected by changes in household finances). It’s also the difference in payment methodology (vices are paid today whereas retail spending payments get pushed out into the future because they are largely credit card based).

From last month’s report:

“Cracks (if any) will Appear February 2017

4Q spending is safe: US consumers are very event driven in their spending habits and they budgeted for 4Q. Vacations were purchased months ago. And Halloween, Thanksgiving and Holiday gift giving budgets were similarly earmarked a while ago.

1Q spending at risk: Consumers are not expecting inflation and their spending behavior has already shifted. The impact on the broader economy has only begun but it is already evident in the Leisure economy.

February is the key month: February is when people are back from vacations and the bills are due. This February they can expect to face the impact of higher fuel prices rippling through the economy. For example, higher heating bills.”

However, the Vice Index may be too positive.

The Vice Index says retail spending peaks in January and then flattens at a relatively high level.

But disposable income has taken a recent hit: interest rates and inflation are both up.

Meanwhile, consumer spending is already shifting away from luxury (an early indicator of slower consumer spending).

What The Vice Index Is Saying Right Now

So far, the Vice Index has been quite accurate.

It predicted a slowdown in retail spending (yr/yr) in the third quarter (Q3) of 2016.

Then is predicted a rebound (yr/yr) in Q4 2016. That’s exactly what happened. Retail accelerated from Q3’s average rate of 2.6% yr/yr to 4.2% and 3.8% in October & November (respectively).

For Q1 2017, Vice Index points to strong yr/yr growth. But that means mild m/m growth.

Remember, Vice spending leads retail spending by 4 months. But the Vice Index data that points to Q1 spending does not include the surge in oil prices. December data will give better insight.

Another Take On Retail Spending: Disposable Income

Disposable income is driving retail spending.

Disposable income is coming under pressure. First, wage growth is slowing. Minimum wage hikes will add some boost, but the general trend is down: from 5% in 2015 to 3.5% in 2017.

Second, costs are on the rise. Interest rates are up and will only continue to rise. And sharply higher fuel prices will inflate costs everywhere. That’s billions of dollars that are no longer budgeted for retail (excluding autos and gas).

That trade-off is already happening.

Gas spending rose in December and spending on Food Services fell an equal amount (we wrote about that here.)  

Consumers are backing off consumer products and services – if you have these stocks, get out.

Luxury Spending Continues To Drop

Diamond prices continue to trend down, especially in the key size most purchased by middle class consumers (0.5 – 1.0 carat).

Swiss watch exports (units) to the US Jan-Nov were down -11% yr/yr… and down – 18% in November.

Retail spending will remain steady, but the quality of that spending has already begun to shift.

Gambling Reflects Household

Cash Flow And Consumer Sentiment

Here’s how cash flow and consumer sentiment go hand-in-hand within gambling.

The ordinary gambler must have extra money in their pocket in order to gamble.

This means they are confident about their finances. After all, the willingness to risk money today implies that one feels positive about finances today and tomorrow.

Insight From Local Casinos – Not Las Vegas:

A trip to Las Vegas requires effort, advance planning, and significant funds for airfare, hotels, taxis and dining.

Conversely, local casinos cater to drive-up gambling: impulsive, spontaneous, and low effort. It is much less costly in terms of time and money.

Even better, local casinos tend to be in blue collar areas: Detroit, Atlantic City, New Orleans, and so on. Vegas, on the other hand, is an international destination that includes both tourists and convention attendees.

Bottom line: Local casinos provide invaluable insight into Middle America’s near-term discretionary spending.

Casino revenues are slowing. Gambling is falling too.

This is not good!

Start with Vegas. Vegas is divided between the Strip and Downtown. The Strip tends to cater to middle and upper income visitors. Downtown caters to more lower income visitors.

Vegas Strip revenue: -3.5%

Vegas Strip revenue (ex Baccarat): 1.7%

Downtown gambling revenue: -5% y/y

(Strip out Baccarat because that game is favored by Chinese visitors and there are fewer visitors; the Chinese government has been cracking down on capital outflow and VIP excursions and that’s cutting into Chinese gambling at all casinos around the world.)

The trend is clear: gambling revenues are flat or contracting.

The Vice Index says this isn’t a short-term hiccup… it’s a trend.

KEY TAKEAWAY: Lower income households are getting hit by higher energy prices and it’s squeezing out other forms of consumption:

Contraction in retail and discretionary spending began with the rise in oil prices.

Higher energy prices are regressive and affect lower income consumers more.

Also noteworthy: the gambling trends reflect slower spending growth.

Be wary of all this other “euphoric” sentiment. The everyday American consumer is starting to close his wallet.




Andrew Zatlin

Editor of Moneyball Economics

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