Retail data is all smoke

August 5, 2015 09:00 AM

The Vice Index is strongly correlated with Retail Sales with a multi-month lead, excluding auto sales and gasoline (see “Spending is no vice”). Note the surge in Retail Sales (excluding auto and gasoline) that began last summer. That’s when gas prices started to plunge. It’s also when the Affordable Healthcare Act (a.k.a. Obamacare) began to hit its stride.

Consumer propensity to spend remains strong. However, while the Vice Index is correlated to retail (excluding autos and gas), it has recently diverged from total retail spending. Drilling down, retail has slowed faster than otherwise indicated by the Vice Index. That’s mostly due to declining oil prices. With oil prices sliding, many are wondering why official retail trade figures declined over the first half of 2015. One naturally would ask why the benefits of gas prices are failing to show up in retail spending figures?

Shouldn’t retail (excluding autos and gas) be increasing if falling prices at the pump have put money into consumers’ pockets?  It is. Spending on certain lifestyle fun, like food services and drinking, continues to surge. The problem is that retail trade figures exclude a big chunk of consumer spending. Except for food services and drinking, retail figures do a lousy job of tracking recreation. Disneyland’s multi-billion dollar ticket sales? Not included. Airline tickets and hotels are not included. Neither are gambling, prostitution or drugs. 

That’s where we come in and set the record straight.

Gambling revenues are up. We predicted that April would show continued growth in gambling revenues. Sure enough, that’s what happened. Compared to last year, April gasoline sales were down $10 billion. So, where did that savings go?
Some went to gambling. First-quarter weather cooled gambling excursions, but a spring rebound has started to bring them back in the second quarter (May’s gambling figures include the Mayweather-Pacquaio prize fight, which likely boosted results). 

But gambling is only one part of the revenue that will go uncounted by the retail figures. 
Investors should take note that there is a dynamic shift in what consumers are buying. Today, the U.S. consumer already owns many of the things they need, and instead are buying experiences, which means vacations, vices, and the associated memories. Hotel bookings and airfare will not get included in the retail figures. Even room service and shows will not be included in these figures. 

So how big is consumer demand? Every hotel and airline beat expectations for Q1 on strong U.S. demand. Marriott (MAR), for example, reported earnings-per-share of 77¢, far above the high end of their guidance (72¢). The results were driven by strong demand and occupancy rates, as well as strong RevPar (the money spent in the hotel beyond the room rate) — that’s including negative results for global business.

The U.S. consumer is spending and gambling and having fun, but you won’t see it in the retail figures, which only track what a store sells.

Cannabis sales continue to blaze away. Colorado’s April pot sales reached a new high of nearly $1 billion in monthly sales. That’s double from last year. Meanwhile, Washington state and Oregon are going to join the fray, and none of this spending will end up in any retail figures.

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