Americans Are Having Fun (And Spending)

Those who can, do. Those who don’t, talk. When it comes to vices, we’re all talk.
But it’s valuable talk. For example, Moneyball Economics was one of the few forecasters on Bloomberg who accurately predicted the July retail figures. The basis for our forecast: vice spending data.

As we head into the holiday shopping part of the year, institutional investors are asking what that data tells us to expect about consumer spending. Simply put, the vice data implies that the economy is starting to look old in the tooth. Healthy consumer spending will continue, but at a slightly slower pace.

No wonder. We are over eight months into the year and the stock market is flat. Households are back from summer vacations and budgeting for back-to-school and holiday shopping. They look at their 401K’s non-performance and have to wonder if maybe they should hold back on big-ticket spending.

Unlike last year with the iPhone 6, there aren’t any must-have gadgets that would tempt people to spend more. There are smart watches, but they are cheaper than a tablet or smartphone, and aren’t exactly flying off the shelves. We are expecting a more subdued holiday season this year.

Big Spending On Pre-Planned Vacations

“The summer travel season got off to a strong start with a second consecutive quarter of accelerating growth in hotel room nights and rental car days booked.”

-Darren Huston, CEO, Priceline

The travel industry has been reporting outstanding results. Occupancy and attendance are at record levels, and spending (RevPar, or revenue per average room) is up at accelerating levels. Guidance has also been strong.

Priceline (#1 Online Travel Company): Room reservations accelerated in 2Q – 26% year over year vs. 25% in 1Q. Car rental days grew 20% y/y vs.18% in 1Q.

Hyatt Hotels: Big jump in occupancy and RevPar.

Disney: Record attendance at theme parks.

Carnival Cruise Line: Strong and accelerating bookings, higher ticket yields.

Travel spending tends to be a lagging indicator as it’s based on household budgets from a few months ago. A cruise or Disneyland excursion was planned and paid for months ago. For insight into the consumer’s current mindset, focus instead on the RevPar. That’s the portion of spending that goes into room service and other incidentals. It reflects today’s cash flow. For instance, ordering room service is pricier than dining out, so more room services indicates that travelers are splurging. That’s a sign that household finances are strong and consumers are willing to spend.

Spontaneous Recreation Spending is More Mixed

To some degree we see strong consumer sentiment flowing through to other forms of recreation. Movie spending is surging. After being slightly down for the year, box office receipts have started to pick up steam (source: Box Office Mojo).

Dining And Drinking Slow Down

Restaurants are the piece to watch. Restaurant and bar activity offers very important insight into the economy:

Proxy for all consumer spending behavior: Very often, Americans hit bars and restaurants because they are out and about, shopping or playing.

Gauge of real-time cash flow: This is typically unplanned spending and therefore a function of immediate and near-term financial conditions.

For employers, we get:

Payroll growth: For employers, labor is a buyer’s market. Leisure has a high level of unemployment (7.5% vs 5.3% for all sectors).
Gauge of real-time demand: Restaurant and bar owners feel shifting economic conditions immediately and respond quickly. The sensitivity to immediate fluctuations in consumer spending comes from thin margins and visibility to cash flow. They know in real-time if foot traffic is up or down, if people are spending or not. Also, thanks to labor law flexibility, restaurant and bar owners can hire and fire at will.

Restaurants And Bars Continue to Be Less Bullish

There’s evidence of a decline in foot traffic at restaurants and bars, as well as a drop in alcohol consumption.

Business has been sluggish in June and July. The National Restaurant Association reported yet another month of slower sales expectations, blaming less customer foot traffic. That’s a trend.

Anheuser Busch InBev – the world’s largest brewer – just reported that US volume sales dropped in 2Q at an accelerating rate, and that’s compared to a quarter with bad snowstorms. The net result: slower sales growth for food services and drinking.

Gas Price Dividend Issues

Food services sales growth accelerated faster than any other retail sector thanks to falling prices at the pump. That is no longer the case. Following hard on the sales-impacting snowstorms, gas prices stopped falling and began rising in 2Q (according to AAA, prices at the pump jumped 18% from May into July). The result: sales growth slowed.

With gas prices down again, if consumers are motivated to spend we should see this indicator turn up.

Vices Personify The Economy in Real Time

(Disclaimer: Moneyball Economics does not have an opinion on prostitution, illegal drugs or other vices. We are only interested in measuring it to gain economic insight.)

Gambling Returns To An Upward Trajectory

Last month we dove into the relationship between gambling and the broader economy (and monetary policy).

A quick update of recent gambling data shows continued upward trajectory. Simply put, people are confident enough in the economy to risk money at the slot machines and blackjack tables.

However, growth looks to be constrained. Note the June Las Vegas Strip Revenues: almost flat y/y.

That’s important for two reasons:

• The Strip is Middle America is dominated by domestic, lower income visitors.
• It’s pointing to slower growth going forward.
• The key takeaway: Still growing, but on a slower-growth trajectory.

Hookernomics: Mainstreaming Prostitution

In less than 10 years, the Federal Reserve has driven millions of American women into prostitution.

Beginning last year, the Bank of England included prostitution in GDP measurements. According to the Office of National Statistics, prostitution generates $9B a year, adding 0.7% to the country’s GDP. The UK isn’t alone. Sweden, Norway and a few other European countries already include it. If you can measure it, you can tax it. Legalization is necessary for measurement.

Prostitution is legal in most of the developed world. In fact, of the G20 countries, prostitution is illegal in just five: China, South Korea, Saudi Arabia, South Africa, and, of course, the United States.

SeekingArrangement.com (SA) is a website catering to men and women who exchange sex for compensation, like an allowance or paying bills like student loans and rent. It has 4.5M registered users.

• 3.3M Sugar Babies
• 1.2M sponsors (aka Sugar Daddies and Mommies)
• Average age of Sugar Baby: 21
• Average age of Sugar Daddy/Mommy: 45
• Average income of Sugar Daddy/Mommy: $500K
• Average compensation: $5K per month

SA is economically relevant because it’s where the 1% converges with the 99%.

Earning $500K or more and spending $60K per year on a mistress: this is the 1%. Needing help with college loans and rent: this is the other 99%.

It’s not an online dating website. If someone wants a relationship or a liaison, there are plenty of other sites like Craigslist and Ashley Madison.

Is it a prostitution website? According to SA, it’s not – repeat not – engaged in prostitution. Its disclaimer reads:

“An arrangement is not an escort service. Seeking Arrangement in no way, shape or form supports escorts or prostitutes using our website for personal gain.“

As a prostitution website, it may not be as explicit as WhatsYourPrice or Backpage, but SA has, at its core, a business transaction: companionship with extras in return for cash and/or the equivalent. SA calls itself a dating site with “mutually beneficial relationships,” and the Sugar Babies aren’t paid, they are given an allowance. A financial arrangement for sex is prostitution, and when it involves millions of participants, it’s worth measuring.

Why Can’t Millions Of Young Women Afford Rent?

Millions of college students and recent grads are struggling to make ends meet. Talk about excess supply: there is a 3:1 ratio of Babies to Daddies/Mommies, according to SA. Sugar Babies need help with their basics: college loans, rent and car payments. (This works well for Daddies/Mommies because these can be hidden as business expenses, which is helpful when dealing with the IRS and/or the spouse.)

Following the recent Recession, home ownership began to plunge while rental vacancies dropped. Clearly, people were being squeezed out of home ownership and forced into renting. Home ownership has collapsed to 40-year lows and rental vacancies have dropped to 30-year lows. The connection is simple: housing is unaffordable and more people have to rent.

How can this be? The National Realtor Association’s Housing Affordability Index assures us that housing affordability has never been better. Young people should be snatching up homes and leaving apartments.

The difference between buying a house today and buying a house in the last cycle is that yesterday’s buyers didn’t need a down payment. Today they need 20%.

San Francisco’s median home price just hit $1M. What recent college graduate has $200K cash for the down payment? It’s like saying Disneyland rides are free, why aren’t more families going? Why aren’t they conveniently forgetting about the $100 per person entry fee, super high airfares, and hotel costs?

For young people, renting is the only option, and that presents another problem: out of control rent.

From 2000-2014, incomes have grown 25% while rents have grown 53%.

Housing used to require 25% of incomes. Today it is bumping 40% in all major metro areas and 50% in New York.

The result: today’s young people can’t buy homes, nor can they afford rents. That’s why millions have turned to the newly legalized form of prostitution: SeekingArrangement.com.

How the Fed Created The Jump In Prostitution

Real estate inflation is outpacing incomes by such a wide margin thanks to loose monetary policy under Allan Greenspan and then Ben Bernanke. This is not coincidence. The Federal Reserve has a specific mandate to boost real estate prices. It has led to real estate being bid up, making both homes and rental properties more expensive. Landlords in turn pass along the higher prices.

It’s a case of economic policy run amuck. Real estate development can boost the economy. Under the right conditions, plenty of jobs and economic activity are generated when homes are built or refurbished. There is also the wealth effect when home prices rise. But when taken to extremes – as it is today and was in the previous economic cycle – consumer spending gets squeezed out in order to pay mortgages and rent. It becomes an incredibly unproductive use of capital.

(Almost as unfortunate, having created the problem of runaway housing inflation, the government has decided that the best solution is to address it via wage inflation by dictating higher minimum wages.)

Simply put, we have a surge in college-age prostitution and it’s the Fed’s fault.

Signs Of Trouble

As we look at the US consumer today, we see strong household finances and a willingness to spend. But as we head into the latter part of the year, we are already starting to see signs of a last hurrah: consumers are gearing up to spend but perhaps a little less than expected.

Nobody seems to be preparing for a slowdown in the economy. Wall Street is in denial and financial advisors are not telling clients to get defensive. We’ve been suggesting that readers consider selling into strength. Cash is not a bad option.

The SA data is evidence of a balancing act for millions of young people. Let’s watch that closely. If the economy slows, we should see an uptick in the number of Sugar Babies, because making rent will become even harder.