Category: Uncategorized

Numbing the pandemic? Sin spending rises

Chart showing sin spending rises during the pandemic including gambling, alcohol, and tobacco.

Background

Personal spending has recovered to pre-pandemic levels.  There are clear winners and losers – think grocery stores vs. airlines.   One area in which Americans’ spending is particularly resilient and in some cases above pre-pandemic levels is the “sin” categories like gambling and alcohol.  This examines where sin spending rises with COVID.

Findings

  • Bad things in our mouths:   Alcohol purchases for in-home consumption jumped in March and never declined (currently up 15% in October vs. the February pre-pandemic baseline).  Fast/takeout food initially dropped but is now actually up 4% vs. February.
  • Bad things in our lungs:  Tobacco spending is up 4%.  This is surprising, because as the year began the tobacco industry expected a decline in usage given both long term trends, and the federal law enacted that set a minimum age for tobacco purchase of 21 years.  Apparently stressed stay-at-home workers and parents have upped their consumption.
  • Crappy year? Try for craps:   Casino gambling revenue initially tanked when they had to close their doors during lockdown.  But with reopening, Americans have flocked to the gaming tables.  Revenue is now trailing pre-pandemic levels by only 9%.
  • Nursing the hangover? – Whether we are dealing with more stress or more stomach problems from the extra alcohol and junk food, we are spending 11% more on non-prescription drugs.  

Implications

Not surprisingly, the comforts we turn to during the pandemic aren’t always good for us — as sin spending rises.  Half of women and a quarter of men say they’ve gained weight since March.  For business, this confirms the stability of revenue streams in the “sin” categories.  For individuals, this confirms the same advice your doctor gives you – moderate your intake of food and alcohol, don’t smoke, try to manage stress.  Of course if we could solve how to motivate better health behavior, we could probably also solve how to motivate better financial behavior.  Stay tuned…

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The small print

The spending data comes from the BEA.  The spending increases are not adjusted for inflation, though inflation was very low during the last year so this doesn’t change the conclusions.  “Fast food” is what the BEA defines as “limited service” restaurants, where you don’t sit down and get table service.

Financial innovation slumps ?

Background

Fintech is all the rage in financial services today.  But what is the innovation trend consumers perceive? Is it possible they think financial innovation slumps instead of proliferates?  This post looks at 70 years of innovation in the category to better understand the long-term trends and implications.

Findings

70 year trend shows potential that financial innovation slumps

Shift from product to distribution:   Innovation from the 50’s to the 80’s included a lot of new products.  These were often driven by bank creativity and by banks supporting legislation that would benefit the consumers:  credit cards, interest checking accounts, innovative mortgages, and index mutual funds.  This has changed in the past 30 years. Most innovation has been in how consumers access services, not in what they can access.

Shift from banks to disruptors:  Early innovation was driven by the traditional giants.  Bank of America pushed out the BankAmericard.  Citibank designed the CD.  Merrill Lynch created the Cash Management Account.  But today, the innovation has come from non-traditional firms pushing out new technology to facilitate consumers’ interaction with money:  Apple Pay, BitCoin, Kickstarter, Venmo, Betterment.   Traditional banks and brokerages have been playing catchup with their version of robo advisors and P2P payment systems (e.g. Zelle).

Shift from full-service to self-service:   Most innovation of the past 30 years has enabled consumers to do it on their own – digital banking and brokerage, online investment tools, mobile deposits.

Intuitive leaps, not consumer requests: The list of innovations, from credit cards to P2P payments, has been driven by creative leaps, not consumer request.  Henry Ford famously remarked that if he’d asked people what they wanted, they would have answered “faster horses”.  Similarly, financial innovation has often met a need that consumers did not articulate – but that creative strategists realized provided an opportunity to both help customers, and make money.  

Implications

Whither banks?  Despite large banks spending big money on strategy and product development, for them financial innovation slumps.  More productive paths have been via collaborations (Zelle) or buying startups (Black Rock buying the robo advisor Future Advisor).  

Innovation isn’t something you ask a consumer to define, despite the millions of dollars the industry spends on focus groups and surveys to understand consumer needs.  No question consumer attitudes, behavior, and financial realities should influence thinking on innovation, but it’s clear you need the creative people to take that and generate next-generation ideas.

More broadly, where is innovation headed?  How many more tools, apps, and currency will actually add value?  Previous posts have suggested that no one has found a solution to helping most Americans save and invest in a way that benefits them.  In fact innovation may cause consumer harm. Absent a financial innovation leap forward in this area, everything else may just be window dressing.

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The small print

The list of innovations and their categorization is all my opinion.   We could argue over if an ATM is a product or a distribution innovation. I welcome the debate!  

COVID cocoon spending jumps

Background

We’ve seen spending recovering over the course of the COVID pandemic; as summer wound down, August 2020 personal consumption spending was only 2% below August 2019.  But given that some spending is still depressed (hotels, airlines, public events), where has spending increased to compensate?  We already know Americans are getting outside more than the rest of the world – see a previous post.  But what is driving at-home COVID cocoon spending jumps?

Findings

  • Living costs – gotta eat and clean:   Grocery purchases are up 10% (over $8B/month), along with household supplies (10%).
  • Working costs:  Electricity costs are up 8% as people use more at home.  Computer and software spending is up 19% which one would think is work related, unless it’s a rush to play Call of Duty or Fortnite.
  • Playing costs:   The recreational category, driven by games, hobbies, and pets, is up 13%.  There has also been a big jump in spending on household furnishings as we turn our eyes to improving our homes.
  • Reading?!? – The newspaper and periodicals category is up 24%/$1.1 billion a month!  The BEA indicates that the big jump was in digital subscriptions in April and May.  Conde Nast reports a doubling in new subscriptions.  

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Implications

It’s obvious that when we spend more time at home, we spend more money at home.  That part of these findings is unlikely to shock anyone.  Of more interest is the impact of the trends of COVID cocoon spending jumps:

  • Will employers compensate for home office expenses?  Electricity and office furnishings are added expenses to working at home.  Of course, they’re offset by lower costs for commuting and clothing (both of which have dropped in the past 6 months) so perhaps we call it a wash.
  • Will the home nesting projects continue?  At some point, presumably we will have redone the guest room, replanted the garden, and painted the kitchen.  Subsequently, spending on home improvements should fall.
  • Will reading make a comeback?  Whether we are seeking more pleasure in reading, more information during the campaign cycle, or just something to peruse in the bathroom, this is an interesting trend that might suggest a return to quieter pleasures.

The small print

The spending data comes from the BEA.  The spending increases are not adjusted for inflation, though inflation was very low during the last year so this doesn’t change the conclusions.  The changes in spending vs. August 2019 are almost the same as if we compared to February 2020, the last pre-pandemic impact month.  Household supplies is primarily cleaning products and paper products.

Consumer freedom or addiction? 100 years of breakthrough banking innovation

Visual presentation of 100 years of financial services innovation showing many examples of products that make it easier to borrow and easier to spend.

Background

If you have a bank account with a large institution, their website probably has a section intended to help you track spending and design a plan to save for retirement.  At the same time, the history of financial services is 100 years of breakthrough banking innovation that makes it much easier to borrow, and to spend, money.  People have responded by…borrowing and spending more money.  Previous posts looked at the increases in household spending which have been dramatic.  This article looks at how 100 years of breakthrough banking innovation has made it easy to borrow and spend, and the impact on household debt.

Findings

  • 100 years of encouraging borrowing:   In 1916 GMAC finance created the auto loan.  Since then we’ve seen federally guaranteed home and student loans, HELOCs, and credit cards being introduced.  In tandem, we’ve seen incentives from government to buy homes.  Think mortgage interest deduction, and Fannie Mae ensuring a market for home loans.  Student loans, also federally guaranteed, have jumped to $1.5 trillion currently owed.  Auto loans and credit cards have become the norm for many households.
  • Products that encourage more spending:  Does anyone remember paying for groceries with a check, or even cash?  A series of innovations in purchasing have created great convenience for consumers.  ATMs let you get cash 24/7. Contactless payment lets you wave your phone to pay.  New credit card policies for many issuers and merchants omit the need for signatures.  PayPal is introducing “Pay in 4”, the ability to buy now and pay over 4 months, essentially the modern digital version of buying on credit.
  • More spending and higher debt:  The aforementioned posts on this site look at the substantial increase in household spending, particularly on homes, cars, and education.  The chart below shows that household debt has doubled since 2003.  

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Implications

We live in a time of financial double-edged swords.  The convenience of easy payment, and the ability to borrow in so many ways, enables people to do things they might have only dreamed of in the past.  At the same time, this convenience leads to more spending and more borrowing.  The Pandora’s box of cool innovations is open and likely will generate new products as Fintech creativity continues to disrupt the industry.  How do we help the customer manage their finances?

  • Serious help – Financial institutions need to be serious about their efforts to reach out and help their customers be intentional about their plan and actions. This means more than a tab on a website, it means talking to customers (live or virtually) and collaborating on how to reach long-term goals.
  • Positive innovation – We’ve seen Fintech services that help consumers track how they’re spending and saving.  Uptake and usage have been slow.  There is an opening for something better – but we haven’t seen it yet.
  • Finding the moral balance – Let’s face it, if you are a bank that makes money from fees, and from interest on home loans, credit cards, and other household debt, there are pressures to maximize near-term revenue.   On top of this, more sophisticated banks focus on selling you the product you’re most likely to buy next. This isn’t customer focused. The long term approach means not pushing your customers to borrow or spend more, rather take a holistic view.  Noble statements saying you want to help cusstomers succeed are great, but some financial institutions need a cultural reality check.  If customer long term success is important, then approach them with holistic help, not product sales.

The small print

To be purer in the analysis of growing spending and debt, we should also look at rises in income.   If you make a lot more money, maybe more debt isn’t so bad.  If you don’t adjust for inflation, the average household income rose 59% from 2003 to 2019 during a period when debt doubled.  Debt rose faster than income.   This also doesn’t account for the increased income being concentrated in the most affluent households, while debt and spending have grown across most households.

Shift to 401(k) like letting a toddler drive a car?

Background

In 1978 legislation was passed that enabled 401(k) plans.  Since then they have become popular with private companies as a way to shift the retirement savings burden away from the employers and onto their employees.  This means a shift to 401(k) defined contribution plans from defined benefit plans (pensions).  How dramatic is this shift, and how are the employees behaving?

Findings

  • Half of private sector employees aren’t participating in any retirement plan:   They don’t yet have money in a pension or a 401(k) plan, either because they choose not to participate or because they haven’t worked at a company that offers one.
  • Huge shift from pension to 401(k):  Today, only 11% of employees participate in a pension plan. Most of these employees also have a 401(k).  This suggests that the pension is a legacy from a less recent employer and probably won’t pay a significant retirement benefit.
  • Participants are investing too conservatively:  A Wells Fargo study showed that almost 60% of participants are investing to minimize loss, vs. seeking enough growth to retire successfully.  Pension managers follow analytic investment strategies to grow the portfolio, but 401(k) participants — who often know little about investing – are likely to take too little risk.  This then puts their retirement at risk.
  • Job changers cash out their 401(k):   A Hewitt study showed that over 40% of the time, someone leaving an employer takes a cash distribution from their 401(k), instead of leaving it in or rolling it over into an IRA.  While companies often force this for those with very low balances, ¼ of those with a balance of $30-50k are cashing out too.  

Implications

This sounds like an SOS for plan participants.  For 40 years the burden of preparing for retirement has shifted to the employee, and they’re not behaving well.  Changes in the 401(k) system have encouraged more participation, but can’t force people to invest intelligently or to keep their money invested in a tax-advantaged plan – vs. pulling it out to buy a car.  Platitudes about investor education seem meaningless when that education has been going on for decades and clearly failing.  The options seem to be:

  • Force investors to invest more responsibly – which is really a return in the direction of pensions and Social Security
  • Accept people will make mistakes and let them, or…
  • Seek a third path of culture change, perhaps tied to behavioral finance.  More to come on this.

And – let’s not forget that nearly half of private sector employees have no retirement plan, neither 401(k) nor pension.  You can’t shift to a 401(k) if you never had a retirement plan. This post isn’t focused on how to get people to participate – or more employers to offer plans.  However, if almost 50 million workers aren’t saving for retirement, the long-term implications for them, and for the government safety net, are huge.  More to come on this in subsequent posts.

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The small print

The percent participation data comes from EBRI, and the most recent data available is 2017.  However, more recent data is highly unlikely to change the trend or the conclusions.  The data on percent of investors cashing out is from Hewitt.  The most recent releases in 2009 and 2010 were the data I used here; however in 2017 their research director confirmedthat the overall statistic of the percent of departing employees cashing out was the same as in 2009.    

Incomes rise with COVID: Do you feel richer than in February?

Background

We’re in the midst of the COVID pandemic and a much-publicized economic downturn.  At the same time, personal income is up since February.  We’ve already seen that personal spending is down.   But how can it be that incomes rise with COVID and recession sweeping the country?

Findings

  • Disposable personal income was up 6% in July vs. February.  This includes wages, proprietors’ (business) income, rental income, investment income, and government transfer payments.  It subtracts taxes.
  • Earned income dropped – but increased government transfer payments far more than compensated for the decline:  Absent the increased government payments, income would be down 4% in July.
  • The government stimulus was both unemployment benefits and the broadly distributed stimulus money :  In April around 85-90% of all US households got the federal $1200/adult stimulus checks.  Ongoing, incremental unemployment benefits have been distributed as states’ compensation programs gear up.
  • Spending is down – so savings is up:  With spending down 5% July vs. February, and income up 6%, the savings rate is still much higher than the historical trend.  The current 18% rate is the highest it’s been since WW II.

Implications

The summary statistic is that incomes rise with COVID.  Of course, every household has a different situation with what they make, if they’re hurting, and how much stimulus or unemployment compensation payments they are receiving.  It’s important to remember, though, that the initial stimulus was a blanket infusion of money to households with the expectation they’d spend it either on necessities, or to buy things that would juice the economy.  The reality is…not.  It appears that most of the money is just sitting in savings.  This shouldn’t be surprising, given that a 10% unemployment rate also means a 90% employment rate.  Most households seem to be hanging on to the extra money as a buffer.

From the US economy and federal policy perspective, this isn’t a good thing. From the personal financial management perspective, this is a good thing.  For once households aren’t spending a windfall money infusion, probably out of fear.  This compares to many people treating income tax refunds as fun money to immediately buy something for themselves.  If you are counseling clients on their finances, a great average outcome for their long-term success would be to keep spending down, stash the surplus income, and if possible keep working.

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The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report.  Because it comes out about a month after the end of a period, we don’t know what happened in the past 30 days.  The data shows that the only significant changes in government transfer payments are in the unemployment insurance line and the “other” (e.g. COVID stimulus) line, so I’ve simplified my estimate of the government impact by using February transfer payments as a baseline and then assuming any change is due to these two categories.

COVID drives American recreation?

Background

Americans have a love affair with travel, and with their cars.  As COVID lockdowns started in March, we changed to sitting at home.  But as anyone who has been on the road recently knows, traffic is picking up.  If many of us are still working from home, where is this traffic coming from?  Are we seeing that COVID drives Americans outdoors? This post examines how we have moved outdoors, COVID be damned.  Or, at least, finding ways to get outdoors separated from other people.

Findings

  • Spending on outdoor stuff jumped:   Cars, recreational vehicles, and sporting goods spending are all above pre-pandemic levels.
  • Traffic is up:  You already knew this!  One example (below) – Golden Gate bridge traffic has rebounded even though downtown San Francisco is still a ghost town.
  • Parks are popular:   Visits to national parks are rebounding strongly toward pre-pandemic levels.  See the Yellowstone chart example below.  
  • Motorhomes are renting like hotcakes:  RVShare, the largest P2P motorhome rental/sharing service, reports 50% more volume of rentals this Labor Day vs. year ago.  Most motorhome rental agencies are reporting dramatic jumps in rentals.
  • So are vacation home rentals:  AirBnB reported in June that it was actually seeing higher rental volume than a year ago as people are desperate to get away from their city living.

Implications

If Americans won’t stay home, what does it mean?  Certainly increased spread of COVID is a risk.  Those providing products and services to travelers need to make them and market them as hygienic.  We’re seeing AirBnB and motorhome rentals advertising empty time between renters, and complete sanitization wipe downs.   For those Americans who worry about the virus but “need” to get out, they will seek cleanliness.

From the financial services perspective, this is an early indication that the rise in the personal savings rate may be a chimera.  Recessions usually depress car sales…but not this time?  Clients may need counsel to not go crazy spending to get out of their COVID grumpiness.

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The small print

The spending data comes from the BEA.  The jumps in spending are not only above pre-pandemic levels, they’re also above last year’s June spend levels.  This means that it’s not just a seasonal effect.

Forced savings: The only way Americans will ever save?

Picture of money; can we only get it with forced savings?

Background

Americans are bad at saving money.  Since the last Boomer turned 21, the savings rate has plummeted.   As the government floods bank accounts with COVID-related stimulus checks, will we change our spots and start saving more? Or is forced savings the only way to get us to put money aside?

Findings

Chart showing the big amounts saved in forced savings plans.
  • We save a bunch in three big savings programs:   Social Security, pensions, and defined contribution (mostly 401(k) plans) get close to $2 trillion of inflows a year, including both employer and employee contributions.
  • Two of these programs are forced:  Employees don’t have a choice with Social Security or pensions – it’s done for them.
  • The other is often “forced” and/or “bribed”:  Employees are often automatically opted in to 401(k) participation, and often “bribed” with large employer matching contributions to encourage increased participation.
  • Savings from these programs dwarfs other savings:  The total personal savings amount in 2017, for comparison, was $1.2 trillion.  That includes much of the contributions to these “forced” plans.  Understanding the government definition of savings is quite complex. However, most of Americans’ savings, including their retirement savings, comes from these three forced plans.
  • What about IRAs?:   Aren’t these a way that people save on their own?  Yes, it’s the single largest category of retirement savings (chart below).  But – most of the IRA assets are actually rollovers from 401(k)s.  In 2017, 84% of traditional IRA “contributions” were rollovers.  Those assets were usually originally saved in a defined contribution plan.
Chart showing that most retirement savings is forced via pensions, social security, and 401Ks

Implications

As Horace Greeley put it in 1867, “We are energetic, we are audacious, we are confident in our own capacities and in our national destiny, but we are not a systematic, a frugal, economical people”.

All three of the highly successful programs that drive savings in this country, work because they are automatic.  Even a 401(k) is now structured to make it hard for employees to not use it.  Yet…despite decades of financial services companies trying to educate customers, pursue behavioral finance motivational techniques, and encourage savings, it’s not working.  The only significant new savings for most Americans is their forced retirement plans.

From a policy perspective, governments may choose to double down on these forced savings plans.  However many financial services companies will resist this approach – either because they believe in the private sector as a superior solution, or because they want to acquire and manage the assets.  Suffice it to say that a new approach will be needed to drive Americans to save more.  Future perspectives in this blog will continue to explore innovation in this area.

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The small print

There’s no one easy source for this data, and the most recent that’s easily available across the programs is from 2017.  Social Security data comes from their website.  Defined contribution and private pensions comes from the Department of Labor.   Government pensions comes from federal data and state summaries.  Assets in retirement plans and percent rollover contributions comes from the ICI.

COVID spending rebounds: stretching to normalcy?

COVID spending rebounds as consumers head out

Background

Personal spending has been hammered since the pandemic lockdowns started in March.  As states are starting to reopen, the May Bureau of Economic Analysis data showed that consumer spending climbed 8% from April, and is now approaching 90% of the February level.

What sectors of the economy are recovering?  Past posts have examined the categories where spending held up – food, alcohol, housing, prescription drugs, in-home entertainment.  Similarly, some categories continue to suffer dramatically – no one is getting on a plane or in a hotel room.  But there are sectors that are starting to show resilience and indicate the consumer mindset that is driving COVID spending rebounds.. 

Findings

  • Doctors no longer pariahs? The biggest category that’s rebounding is health care.  Spending was down 40% by April as people were either afraid to seek non-emergency care, or weren’t allowed to.  It’s recovered over a third of the decline. Still it’s lagging. And maybe it’s an excuse, but almost no one is going to their dentist.
  • Make my house nicer:  Spending on household furniture and furnishings is back at pre-pandemic levels.
  • But…get me out of the house!  Spending rebounded for cars and for recreational items, with the biggest recreational category increase “driven” by RVs.
  • I want to go to the mall?  Jumps in clothing purchases and eating out haven’t returned those categories to anywhere near their pre-pandemic levels, but still show that many people have been itching to get out to eat and shop.

Implications

There are three offsetting implications.  The first is around spending:  it’s hard to keep Americans from parting with their money.  The stimulus checks actually sent income jumping up in April, and in May people started their COVID spending rebounds.  It appears that we were willing to hold off on shopping for a couple months, but now are ready to go to the mall.  We are a social species and we don’t like being cooped up.  

The second issue is the resurgence of virus cases.  On the heels of our going out again, more people are sick.  Governors are closing bars and stepping back from their reopening plans.  We will likely see a spending uptick in June data, but the summer months may see a spending pullback as people fear getting sick, stimulus checks run out, and establishments face more restrictions.

Finally, what does this say about our ability to save?  Probably the best thing Americans can do from a personal perspective is to save as much as they can.  We’ve never been good at this.  In May, income fell 4% as stimulus payments tapered off.  Spending rose.  Therefore, the savings rate is coming back down.   While consumer spending is good for the economy, it’s not good for individuals who don’t have savings.  How do we encourage people to keep preparing for retirement when the message from governments is to get out and spend? Future posts will address this need.

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The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report.  Because it comes out about a month after the end of a period, we don’t know what happened in the past 30 days.  All the data is reported annualized – e.g. the May numbers reported are 12x the actuals observed because the BEA always annualizes for comparison purposes.  The recreational category includes computer and software purchases, which were also up in May.

Some COVID spending holds up: What we buy during lockdown

Courtesy of Peggy CCI via Pixabay

Background

The April Bureau of Economic Analysis data showed that since February, consumers have cut back on spending by 20% with most sectors getting hammered.  However, there are a few areas of the economy that have stayed strong.  Some COVID spending holds up., What are they, and why?  And will they continue to be strong?  

Findings

Chart showing that spending on groceries and alcohol dropped back to normal levels in April.

The chart above shows the change from February, the month before the lockdowns started.  For each category, the top (blue) bar shows how much March changed vs. February.  The bottom (orange) bar shows how much April changed vs. February.  You can see from this the categories that jumped in March but fell back in April.

  • Food and sin are back to “normal” levels: While grocery and liquor jumped in March as people stockpiled, in April they fell back near their February levels.  Tobacco sales have been consistent February through April.
  • Screens are solid:  Spending on Internet and cable/satellite TV has held up through the lockdown.  If you’re at home, you can’t cut back on the web or the Netflix.
  • Quarantine amusements a flash in the pan? Spending on toys and games jumped in March, presumably as people prepared to deal with more time at home.  However, April spending was lower.  Perhaps there are only so many jigsaw puzzles one can assemble.
  • Can’t avoid houses and bank fees:  Two huge categories, housing/utilities and financial services, have held up.  It’s hard to stop paying for a place to live, or a credit card fee.  This suggests that at least through April there hasn’t been a wave of renters or homeowners stopping payment. 

Implications

The “recession proof” industries are ones you’d expect – eating, home entertainment, housing/utilities, sin (alcohol and tobacco).  So — for some categories, COVID spending holds up. But the decline from the March surges has implications for the broader economy:

  • Not a grocery/eating out tradeoff:  In March, the decline in restaurant spending was offset by the growth in grocery spending.  In April, groceries fell back to normal after people stopped stockpiling.  But dining out tanked further, leaving total “eating” spending much lower and a big hole in the economy.
  • Sin is always “in”:  Interpret it how you will, Alcohol and tobacco sales are sturdy.  Historically, in a recession alcohol sales fall somewhat in dollars but climb in quantity as consumers move away from luxury tipples.
  • Housing spending stability may be an illusion:  In April most renters – and homeowners – were likely still making their payments at the beginning of the month before the recession set in.  The real test will be in May and beyond as incomes fall (assuming the federal stimulus ends).

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The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report.  Because it comes out about a month after the end of a period, we don’t know what happened in the past 30 days.  All the data is reported annualized – e.g. the April numbers reported are 12x the actuals observed because the BEA always annualizes for comparison purposes.  The housing data is a bit wonky as there are assumptions of value and payments in there, but should be a reasonable rough estimate.  The financial services category includes insurance, bank commissions and fees, and a large category of “implied” expenses, complex enough that I’m not going into them here.