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Vice Index Shows U.S. Slowdown Ahead

Slower Spending Growth In Q3

When Vice spending momentum began to slow in February, I blamed near-term noise.  I thought it might be tied to February’s tax refund deferral.

And when it slowed again in March, I blamed Easter.

But vice spending growth continues to slow.  In fact, in the latest month, it points to contraction in 3Q or early 4Q.

And we’re already seeing that slowdown in the latest Retail data. May retail spending downshifted significantly. It dropped from 5.6% year-over-year (yr/yr) growth in January to 3.8% yr/yr growth in May (the lowest of the year).

Recent Macro Data Confirms the Downshift

People spend what they earn.

As income growth slowed, so have Personal Consumption Expenditures (PCE).  And this is after gas price inflation has moderated.

 

Spending could rise if wage inflation picks up. Or if payroll growth accelerates (or both). But that scenario is unlikely in 2017.

Meanwhile, alternative sources of money are slowing. The biggest being student loans.

Student loans are the biggest scam going: money is given but only a fraction goes to tuition.  The rest has been recycled into the consumer economy via cars, vacations, iPhones, and so on.

 

Revolving credit has also rolled over.

Add it all up and conditions are set for slower spending growth.

It’s already showing up in the luxury spending we call vices.

Like in Gambling & Prostitution

Gambling Continues To Slow

 The above chart averages the rates of gambling growth for Detroit, Maryland, Connecticut, Atlantic City, &  Pennsylvania.

While comps play a role in exaggerating some of the contraction, the trend is clear:  less gambling.  And that means less hot money floating around households to play with.

But it’s even more obvious in the middle and upper ends of the market.  Take Las Vegas: the Downtown area caters to more lower-income gamblers.  The Strip is for the middle and upper income gamblers.  In the latest month, Downtown gambling rose 9% while Strip gambling rose 3%.

Prostitution Price Inflation Slows

A sampling of escort prices in major urban markets shows that, after moving up sharply in late 2016 and early 2017, escort prices hikes have leveled off recently.

The reasons are:

  1. Market dynamics: the recent big (~15% on average ) uptick in prices has to be absorbed
  2. No inflation pressure: hotels are the primary cost that escorts pass along. And hotel prices are flat and even down in most major markets (per Trivago’s Hotel Pricing Index)
  3. Opportunity has slowed: Price hikes have been largely opportunistic.  That is, thanks to the surging stock market beginning in 4Q17, customers seemed to have extra disposable income.  The S&P surged ~15% in the 4 months from November to February but only 1.5% in the 2 months since then.

Even more interesting is that mid-tier escorts have begun to offer discounts.  The frequency is limited, but enough to stand out.  And the price deflation is significant – it rolls back most of the recent price hikes.

Why the soft demand?  Affordability.

It’s not that pay-to-play inflation outpaced affordability.  Prices were raised ~9 months and demand remained strong.  Suddenly the phones aren’t ringing off the hook.

And it’s not stiffening competition.

This is a demand problem.  And price cuts are a great way to firm up demand.

If this is trend, we’ll see more discounting through the Summer.

KEY TAKEAWAY: We’re seeing downturns across the board in most of the Vice Index data. I see volatility picking up in the third quarter as the market realizes people are starting to pull back their wallets from vice expenditures like gambling and escort services.

 

Andrew Zatlin

Editor of Moneyball Economics

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