Vice spending continues to grow, although it looks headed for a slightly slower trajectory.
The August dip came from last year’s particularly strong comp (strong vicing in August last year). September brought us closer to trend and the next few months will see us fully back to trend.
That trend corresponds to 3.5%+ retail sales growth, which is consistent with wage growth expectations.
All About Wage Growth
People are playing and spending because wage growth remains steady. Plus, inflation is in check.
Inflation is a non-issue for now: it is low and expectations have fallen to a six-year low. With respect to wages, despite two consecutive months of weak payroll growth, the story points to continued growth of 3.5%-4%.
All of this points to steady vice and retail spending.
Collection Agency Payrolls Down, Casino Payrolls Up
Household finances are so strong. Meanwhile, collection agencies are struggling. Collection agency payrolls jumped during the recession, but by 2011 they had fallen to pre-recession levels. Starting last year, they began to contract again.
Recently, Ocwen (OCN), one of the largest publicly traded agencies, reported a 10% cut in its workforce. This is a strong counter-cyclical signal. It’s saying that consumers can easily spend.
Following hard on that signal, casino payrolls are up. They are close to a cyclical high despite several Atlantic City casinos closing in 2014 and a loss of 9,000 jobs. A lot of gambling is going on to keep those workers on the payrolls.
If I wanted a Consumer Financial Stress barometer that signaled healthy household finances, it would be one that showed households:
- Are paying off debt.
- Have plenty leftover to hit the blackjack tables.
Gambling activity is steady, which is a statement about consumer sentiment and cash flow.
- Cash Flow: Ordinary gamblers have to have extra money in their pockets in order to place bets.
- Consumer Sentiment: The ability to lose money today implies that one feels positive about finances today and tomorrow.
August gambling dipped on the late Labor Day weekend. This includes local casinos which enable drive-by gambling, a type that tends to be impulsive and cash-flow enabled (unlike Las Vegas which requires more effort and advance planning). Also, these casinos tend to cater to blue-collar and middle-class gamblers, so it reflects more accurately on the consumer sentiment of Middle America.
The trend has held steady. Revenues were growing in the low-single digits and they dipped nearly -7% in August due to the big gambling weekend spilling into September. Adjusting for that calendar quirk means that Middle America gambling remains steady, and that’s a big positive sign for retail sales in September and going forward.
As wage growth continues to hold its pace, consumers pay off debt, and Middle America casino revenues grow, the recent slowdown in vice spending seems destined to pick up in the short term.