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Vice Index: Retail Spending Pace Is Beginning To Peak

Retail Spending Pace is Peaking

Vice Index points to steady consumer spending… But it is going to slow in the next few months.

The nominal spending level continues to expand (more people are entering the workforce and wages are growing). But it’s growing at a slower pace. This month will see a favorable year-over-year (yr/yr) growth rate but that’s because last year was so low. Going forward the pace is set to slow.

On a month-over-month (m/m) basis, Retail spending (ex Autos & Gas) is pointing to a slightly lower 0.2% average growth for 1Q17 (slightly below previous expected pace of 0.2%~0.3%).

Update From Last Month’s Report

The Vice Index may be too optimistic though.

The VI typically leads retail spending (ex Autos & Gas) by four months. But, like all leading indicators, it loses some accuracy when there are sudden external economic shocks… like a surge in oil prices or higher interest rates.

As I pointed out last month, the VI “does not include the surge in oil prices. December data will give better insight.

Vice Index says retail spending peaks in January and then flattens.

But disposable income may slow sooner.

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

The December retail data confirmed my suspicion: higher prices at the pump are squeezing out discretionary spending. Gasoline spending rose $0.7B and Food Services dropped $0.5B.

Current: Vice Index Points Slightly Slower Pace In Spending

The Vice Index pace of spending has pulled back.

This is also consistent with the slower wage growth and disposable income.

Unless wage growth picks up again, retail spending will continue to slow.

Slower consumer spending is not something companies want at a time when their margins are getting squeezed by higher input costs and higher healthcare subsidies.

(Many companies absorb the bulk of the healthcare insurance inflation).

The higher minimum wages will take some of the sting out of higher gas prices… But not much.

The stock market has priced in a lot of earnings growth, and that’s hard to see going forward.

Companies face a lot of margin squeeze: higher labor costs thanks to minimum wage hikes, higher capital costs thanks to interest rate hikes, higher input costs thanks to increases in commodity prices, and higher healthcare costs (most companies subsidize the bulk of insurance rate hikes).

Whatever Trump promises to deliver, it better come soon or these stock prices will pull back. The market has priced in most of Trump’s promises as if they’re coming sooner than later.

Meanwhile, Cannabis legalization is a BIG win for State coffers.

See both of the charts below.

Colorado Cannabis Tax Revenue Keeps Rising

  1. Annual Tax revenues hit $185 million (M)
  2. Up 3x in 2 years
  3. Retail prices still falling (thanks to market forces)

In 2016, Cannabis sales generated $185M in Colorado state tax revenues.

To put that in perspective, Colorado’s Annual State Budget runs $13B, of which $4B is generated via sales taxes. Cannabis sales boosted the total tax revenue base 1.5% and added 5% to total sales tax revenues.

The economic benefits are even higher when you include income from pot tourism, salaries, and sales tax on accessories. Meanwhile, the municipalities get in on the action as well with their own local sales taxes.

That’s $185M in tax revenue from a very green, very under-developed revenue stream.  By way of comparison, after 70+ years, gambling generates $800M in annual tax revenues for Nevada.

Plus the gambling tourism business generates another $1.2B in tax revenues for Nevada  from the hotel/casino industry. Everything gets taxed: from drinks to slot machines (a single slot machine license costs $125 per year.)

In the case of cannabis, Government has turned a cost center into a revenue generator.

Instead of dumping money into fighting a losing battle, Colorado and other states have turned the problem into a strong source of much needed revenue.

This won’t be the last vice to be turned into a positive social benefit.

KEY TAKEAWAYVice data says consumer spending is good, not great. If the market wants great, that could be a problem

As an investor in the stock market, think about taking some profits.  

I say that because I remain skeptical of this rally and not because I have a perfect crystal ball.  

After all, with a goal of capital preservation, I exited the market in the Summer. I didn’t lose money when it slid over the Summer and Fall, but neither did I get to play in this big run-up.

But I ask myself – where does the market go from here?

The P/E is super rich because the price has surged while earnings have yet to follow… And that’s 5 months into the rally.  

So one concern I have is that we might have a pullback on disappointment. Again, the market needs great results to justify the current lofty levels. Good just won’t cut it.

Confirmation of rightness or wrongness comes next month when earnings season kicks off.   

Forget the optimistic surveys – the market will finally see if wallets have really been opened.

The other reason to cash out some winnings is because that’s what the big boys are doing. The market has been pulling back as fund managers rotate positions to lock in their gains.  

After all, there is a lot of risk the next few weeks: interest rates could move up. Trump fiscal policies may or may not get announced. And there is no significant earnings news.

No harm in heading to the sidelines and watching the next season unfurl. For fund managers, it’s been a great first quarter and the year has just started.

Sincerely,

 

Andrew Zatlin

Editor of Moneyball Economics

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