It’s a New Car!

I still have several earnings reports and conference calls to go through, but it appears my theory regarding slowing consumer spending is being supported by Q3 operating results. I wouldn’t call it an air pocket, or even a consumer recession (yet), but it’s definitely a noticeable slowdown.

Earlier in the week, The Wall Street Journal published an interesting article titled, “The Non-Affordable Care Act’s Restaurant Recession.” It was very good and discussed the economic drag higher insurance premiums are having on the economy and the restaurant industry.

I can relate to how higher premiums are influencing consumer spending. We recently received our 2017 premium notice and it was up significantly. How much? Let’s just say the new premium was up a similar amount as a car payment. After we received our new premium, I ran outside to check and there wasn’t a new car with a big ribbon in the driveway. Rats! The health care plan is the same, so for a new car payment we receive no incremental value.

Whether or not rising healthcare premiums are contributing to slowing consumer spending isn’t debatable, in my opinion. Without a commensurate increase in incomes, higher costs affect spending. It’s pretty simple. Considering the size of the increases, family and corporate budgets will need to adjust. As insurance premiums are sent out and the sticker shock sets in, it shouldn’t be surprising the consumer is pulling back and jobless claims are beginning to rise. In effect, families and corporations are already making the necessary adjustments.

Some good quotes for the WSJ article:

  • “Restaurant traffic has declined 2.8% from the start of the year through September…”
  • “2016 would be the weakest annual performance since 2009…”
  • “In the past 10 months eight major restaurant companies…have filed for bankruptcy.”
  • “…Civic Science found that more Americans are spending less on dining out…The No. 1 reason was, not surprisingly, a worsening of their personal finances.”
  • “…diners who had increased health-insurance costs over the past year, 47% cut back on restaurant spending.”
  • “The average cost of benchmark premiums on the ObamaCare federal exchange rose 2% in 2015 and 7% this year. But last week the Obama administration confirmed the average cost will increase by another 25%.”

I’ll continue to monitor the consumer closely. I have more earnings reports and conference calls to go through, but so far it doesn’t look like the consumer is going to be the catalyst needed to reinvigorate the current economic and profit cycle. In my opinion, above average growth remains essential to justify current equity valuations. I continue to ask, if not the consumer, what sector of the economy is in a position to provide this growth? Based on recent business operating results and outlooks, it’s highly likely I’ll still be asking this question in Q4 2016 and in early 2017.

Have a great weekend!