US incomes Aug14

US retail sales tell a sorry story about the state of underlying demand.  US sales at Wal-Mart, the world’s largest store chain, have failed to grow for 6 consecutive quarters, with shopper traffic falling 1.1% in Q2.  The company’s explanation for the problems is worth pondering by anyone in business:

  • It is facing intense competition from discount ‘dollar stores’, as many working families have little spare cash
  • Major cuts to the food stamps programme are impacting the 20% of sales from this area
  • Consumer preferences have shifted away from big-box stores to small local convenience stores

Equally depressing is the recent boom in M&A.  As the Financial Times notes, this does little to “materially improve the overall prospects for the economy and increase overall prosperity“.  Instead, the end-result is merely to enrich the dealmakers, and investors in those companies being acquired.

The chart above from the New York Times highlights the core issue – the decline in incomes:

  • June’s median household income was $54k ($2014), down 3.1% from 5 years ago – the recession’s official end
  • The steepest decline has been in families with 3 or more children, normally a core group for retail sales
  • And the trend is long-lasting – median incomes today are lower than in 2000, when current data begins

The reason is, of course, demographics.  The US boomer generation was 52% larger than the previous generation, and 2001 saw the oldest Boomer move into the New Old 55+ age group.  As every consumer marketer knows, this is when retail spending starts to slow, for two obvious reasons:

  • The New Old 55+ already own most of what they need
  • Their incomes are declining are they move into retirement

US policymakers have tried to disguise this impact by creating ‘wealth effects’ – first in housing via subprime loans, and then in the stock market via the quantitative easing programmes.  But buying a house that you can’t afford doesn’t create permanent wealth, as we learnt in 2008.  And fewer Americans own stocks (52%) than own houses (65%).

So today’s gains in financial markets have even less effect than mortgage equity withdrawal in the 2001-5 period.

Confirmation of this conclusion comes from the Russell Sage Foundation.  Their new report shows the mean wealth of American households fell to $308k in 2013 versus its peak of $424k in 2007.  This means household wealth is lower today than in 2003, when it was $337k.

SOCIAL SECURITY BEGINS TO RUN OUT IN 2016
Will things now get better?  After all, the chart shows incomes have been seeing modest gains since 2011.

The key issue is the one that nobody wants to discuss, retirement incomes.  America’s ageing population means there are more and more retirees.   46m Americans currently claim an average of $1294/month in Social Security benefit.  And their numbers will rise to 77m by 2033.

As the Senate Finance Committee highlighted in March:

“Most Americans have saved only a fraction of what they need for retirement. Workers approaching retirement age have an average retirement savings of less than $27k.  One third of Americans aged 45 – 64 have nothing saved for retirement at all”.

Even worse, as investment magazine Barron’s points out, the latest report from the Trustees of the US Social Security and Medicare systems shows that both are already living on borrowed time:

“You will find one thing, if you read deeply into even the most optimistic trustees’ report: We’re doomed.

“If benefits for the baby boomers — the wealthiest generation in U.S. history — are not tamed, they will consume the retirement system, then the health-care system, then the rest of the federal government, and finally the wealth of every younger American.”

It adds that within 5 years, the US Treasury “will have to sell bonds in the open market” in order to pay benefits.  The reason is simple – Social Security is a pay-as-you-go system.  So as more people retire, then costs go up.  The blog’s detailed analysis of US demographics in December highlighted the critical data:

  • Increasing life expectancy means people live longer, so people claim Social Security for longer.  Life expectancy has risen by 9 years since 1955
  • Decreasing fertility rates means fewer people paying into the system.  US women today have half as many children as in 1955

Or as the Social Security website confirms, the average 65-year old American can now hope to live for 20 years in retirement.  But by 2033 there will only be 2.1 workers for every beneficiary, compared to 2.8 workers today

Already the disability trust fund component of Social Security is expected to run out of cash around the end of 2016.  The writing is also on the wall for the larger retirement trust fund, which will run out by 2033.

At that point, either taxes will have to rise to pay benefits, or benefits will cease.  And the same is true of Medicare, which will run out by 2030.

Social Security is not a ‘nice-to-have’ benefit.   Half of all married couples, and three-quarters of all unmarried people, rely on it for at least half of their income.  Overall, it currently provides 38% of all retiree income.

Any company considering a new investment on the basis that ‘things will soon return to normal’ should therefore ask themselves ‘What do we mean by normal?’.

After all, the New Old are already responsible for more than a third of all US consumer spending.  And consumption is more than two-thirds of the US economy.

We are in fact transitioning to a Boomer-led New Normal, which will be very different from the Boomer-led SuperCycle.  As the retailers are already learning, this will feature lower incomes, reduced household wealth – and probably, lower retirement benefits.

 

WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:

Brent crude oil, down 7%
Naphtha Europe, down 5%.  “Poor downstream demand continues to impact on the market, and cargo prices hit a new low for the year as a result”
US$: yen, down 1%
PTA China, up 1%. ”Downstream polyester demand remained weak during the week, with end users largely purchasing only on a need-to basis”
Benzene Europe, up 1%.  “With the spread of benzene over naphtha maintaining at $500/tonne or more, many downstream players feel that this is unsustainable and not a healthy reflection of global market fundamentals”
S&P 500 stock market index, up 9%
HDPE US export, up 12%. “Some traders and brokers still have older material on hand and are willing to offer it at a cheaper price, particularly as prices from Asia are moving lower.”