THURSDAY, FEBRUARY 8, 2018
Consumer spending has a significant impact on the state of the economy. With all the controversy and uncertainty of the Affordable Healthcare Act, what will the effect be on the consumer in 2014? We are joined by Britt Beemer, chairman and CEO of America’s Research Group, who will fill us in on what American consumers are thinking and the potential impact it can have on the economy in 2014.
JIM: Consumer spending drives the U.S. economy. Not so long ago we had a negative savings rate. Now consumer data is down; however home equity is also down. What impact does all this have on consumer spending? What about ObamaCare? Well joining us today is Britt Beemer of American Research Group. He is Chairman and CEO of that group founding it in 1979. He is a nationally recognized consumer and research trends expert and senior analyst for the Heritage Foundation. He is a published author and frequent public speaker and commentator; to help shed some light on what’s going on with the consumer and what impact some of these things may have as we go forward in 2014. Welcome Britt.
BRITT: Well thank you.
JIM: Hey it’s great to have you and I think this is real timely to have you as a guest because I’ve heard that the U.S. economy is based roughly 70% give or take on consumer spending and I know you are a consumer spending expert, and I’ve heard a lot recently about ObamaCare and what impact that might have on consumer spending and you’ve been at this a long time. When did you start doing consumer research Britt?
BRITT: I started ARG in January 1979.
JIM: In the period of time that you have been researching consumers with what we have going on right now, is this one of the most impactful things you can see going forward since you’ve been doing it or have there been other situations like what we have with the implementation of ObamaCare that might affect consumer spending habits?
BRITT: It’s one of the three. Certainly during the Jimmy Carter Presidency, there were real challenges. Consumer spending was dramatically impacted by that. Obviously on September 11, consumer spending was dramatically effected by that a bit for almost five weeks, and I think now with ObamaCare coming into effect, not knowing what’s going to happen to all the uncertainty; I just did a survey this week as a followup to Christmas and 9% of consumers said they spent less at Christmastime due to ObamaCare. Certainly it has a negative impact on consumer spending.
JIM: Bringing that up typically when consumers get their tax refunds, usually they put those refunds toward different things, a lot of times new purchases, but how many consumers are going to be using their income tax refunds to put toward bills, debts, credit cards, versus maybe just spending it?
BRITT: Well you asked the $64 billion question. About seven years ago we started seeing consumers put as much as 50%-60%-70% of their income tax refund checks toward bills, debts or credit cards. In this past year, even though the consumer now has gotten their finances much better; their situation has not been in bad shape. They had some difficulties but not really a big problem as they would describe it, we noticed that consumers were still putting money away into saving. What’s happened is one of the little known secrets about consumer habits has been over the last 15 years, when parents would send their children to college and help pay for their college education, which was about 40% of parents; they would borrow money from their home equity line. They would use that as the money to be able to help pay for their children’s college fund. As home equity values have collapsed and there is very little equity in most people’s homes today, you are now seeing over 40% of parents taking every dime they can save and putting all that money away in a savings account for their kids’ college funds, so you’ll probably see one out of every three consumers who get an income tax refund check this year not even spend one dime of it. It will all go into a savings account.
JIM: That’s real interesting. We had a guest awhile back and they were talking about how parents were now contributing more to education and they were saving more for education and I never really thought about the fact that the old way of doing it is no longer available with the home values changing. It’s really forced them to be maybe a little bit more responsible in preparing for that.
BRITT: No question and here’s the byproduct of that. At one time, when you think about big ticket items at $500 or more, at one time income tax refund checks in March, April and May impacted over 50% of all those purchases of $500 or more so when you wipe those out, you have dramatically impact on people like Home Depot and Lowes who are probably three-fourths of all those home improvement projects were over $500 and now are not happening at all.
JIM: Now earlier, you had talked about consumers aren’t putting as much toward debt. Now does a lot of that have to do with the fact that now consumer debt has improved dramatically after the last downturn, we’ve seen consumer debt drop and I’ve heard numbers I think as much as 30%. Maybe you are better in tune with that. What have you seen with that and is that having an impact on how they’re spending now that they don’t have the debt?
BRITT: Well what happened is you have 74% of consumers all the way through June of last year said that they were going to avoid credit cards like the plague. I noticed that when the Christmas season started, that number dropped to 65, so there has been a little bit of a shift downward to say, may I’ll buy a few things, which they did because if you look at our data now you go back and look at the Christmas season, there are consumers who shopped on Black Friday or Thursday night and used their credit card to get those early bird specials and of course to pay for those bills as soon as they arrive because they do not want to ever get in a situation like they were before where they had creditors call them every month or every week.
JIM: We need the government to have the same attitude, don’t you think?
BRITT: Well it’s just ridiculous I think but what’s sad is, is nobody wants to deal with the debt. I worked on Capitol Hill for eight years and my boss was on the Appropriations Committee for five of those eight years, and I’m just appalled by what we’re doing or not doing because they could fix the damn problem, but nobody seems to want to face any challenges and then when you’ve got different political philosophies like debt’s no problem, I guess you could have that attitude until you start to drive the pickup truck over the edge of the cliff and the fall may be fun but you’re going to die when you crash,.
JIM: It seems like that’s the one thing that both sides agree to is that we can spending more than we make, so they do have a consensus there.
BRITT: Yeah, I know it makes no sense to me and then when somebody speaks up and says, well that’s not what our party stands for, then they almost get run out of the party for being bold enough to say we need to balance our budget on the government level just like we do on the household level.
JIM: I’ve shared this with clients many times. I still have a lot of optimism and I think our government is really a reflection of the people and if we look back prior to the last downturn in the market in 2008-2009, you had people with record amounts of consumer debt. They had a negative savings rate and you saw the state governments were having all their problems; the municipal governments were having their problems. What we saw with that drop in the marketplace is we have seen a lot of states start fixing their balance sheets, local governments starting to work towards fixing their balance sheets, the home consumer fixing their balance sheets. It just seems like the message hasn’t got to Washington yet.
BRITT: Right, and when you talk to legislators, they say one thing, but when they get to Washington they do something else. It’s just unbelievable.
JIM: Yeah, well let’s get back to the consumer spending. We’re at the time where people are going to start in the next several weeks here, getting ready to prepare their tax returns and getting tax refunds, and we talked a little bit about college. What to do you see for parents as far as taking those checks and putting them into a college fund as opposed to spending the money?
BRITT: Well, I think that those parents of children middle school and older I think almost every one of those dollars will go into a college fund unless they are wealthy, they don’t need it, but I think you are going to see record numbers of dollars go into college funds, and I think it’s likely that that may begin to shift downward. The trend in the last three years has been middle school and older but these people I’m sure are going to find out that they can’t save much just in six years and if they have multiple children, they can’t. In our last survey in January it suggested that that more parents are thinking about saving money for their kids’ college with their tax refund check so they may move into the third and fourth grade level, which will take more dollars out of the marketplace, but more dollars in savings accounts.
JIM: Alright. Well we’re going to take a short break and when we come back, let’s talk a little bit about what you see coming this Christmas season and what impact it might have in 2014, so please stay tuned.
JIM: Welcome back as we continue to meet with Britt Beemer, Chairman CEO of America’s Research Group to talk to us a little bit about consumer spending and what they see in the past and what they might see going forward with consumer spending making up with what some experts say is approximately 70% of the U.S. economy, this is going to have a big impact on what your portfolios might look like over the next coming months. Britt, before the break, we were talking about one of the issues that was a trend that you saw is parents putting more money toward their kids’ college education and I had talked about we had a guest awhile back that was confirming that, seeing that the amount of money that was put into college savings accounts had dramatically increased. One thing that neither one of us failed to recognize is the fact that the old method of taking out home equity loans with the current housing market, that option has been taken away for many Americans, so they are forced to actually use dollars from their savings to help those kids out and with college costs being what they are, I think that can be a big part of household spending taking away money for other luxuries that they might otherwise spend it on. Britt, what do you see with the Christmas season? You talked a little bit about what happened here over Thanksgiving weekend that people actually broke the wallets open and did use their credit cards to spend a little money and get some deals. Do you see that having a major impact this Christmas that people are going to get out there and spend a little bit more than maybe they have in the past or are they still pretty skittish?
BRITT: Well I would describe this consumer this Christmas season is probably the most bargain-driven consumer in the last 15 years, and what I mean by that is, is the last year consumers when they were shopping for Christmas gifts, the number one price gift range was $35 to $50. This year the number one price gift range was $25 to $35. It actually fell an entire group down into a little bit lower price points. Now consumers did actually give more gifts to more people this year, but they spent less on every gift that they bought which I think will end up being around 2.2% to 2.4% increase in sales. We won’t know exactly until Walmart reports their sales, but when they do you will be able to get a good sense of where retail ended up, but I think what you’re going to see now is a very cautious consumer who will shop at stores when there are big deals and bargains. They will not shop in the stores unless they’ve got great deals or bargains. The one thing I’ve said over the last few years, Christmas has really changed. How many days between Thanksgiving and Christmas do the consumer save 50% off because that’s when they go shop?
JIM: Now your customers are typically businesses. When you talk to them, what are they doing? Are they thinning their margins to where they can’t even money or are consumers just buying less expensive items where the company still can have some margins and have some profits? What do you see?
BRITT: Most companies have tried to cut their overhead to the bone. As you know one of the National chains this last Christmas season did not increase their seasonal hiring like they have in previous years to keep those costs down, so a lot of companies are really trying to keep their cost down and their biggest fear is healthcare costs. I mean there is no doubt in my mind that every one of my retail clients everyday wonders what is going to happen this year when the healthcare plans that they offer to their own employees may or may not be valid under ObamaCare and therefore they may be cancelled and have to go find something else themselves. You’ve got this huge amount of uncertainty that is sitting over American businesses now but of course small businesses carrying under 50 people which are the vast vast majority.
JIM: Now do you see the consumer equally uncertain as those business owners because I’m hearing a lot of these businesses and you’re echoing what I’ve been hearing is a lot of businesses are really debating whether or not to keep providing healthcare because of not knowing what those costs will be. They know what the penalties are right now for not providing it from what initial reactions are to some of the pricing, it sounds like businesses will save money on their healthcare by just paying the penalty.
BRITT: I’ve heard that but almost every one of my clients I think will continue offering healthcare, but the difference is their employees, while they hire copay for them to be able to participate; I’ve got a lot of clients where the employee pays 20%, the employer pays 80% of the healthcare insurance costs. I think that could very well be 70/30 or even 65/35, so I think you’re going to see a bigger burden put on the backs of the employees which obviously impacts how much dollars the employee now has to take home, now obviously impacts retail sales immediately.
JIM: Again, I’m not an expert on the healthcare subject and we’re going to have a guest coming up that is, but I’ve heard for younger people, that there might be some dramatic increases in the healthcare cost. I know we had a guest on back in the summer where he was talking about in Wisconsin, the young males, which are the lowest risk from a health insurance standpoint, could be seeing as much as triple the rates as they don’t have as much discrepancy in the ratings for age and also they do away with the rating based on sex, so these rates are going to be more condensed and the people on the low end of the cost spectrum are going to end up paying dramatically more. Now with consumers, what age group are the consumers that are doing the most consumer spending?
BRITT: It varies. Obviously the consumer group that spends the most amount of money is families with children. They are obviously the biggest spending group in the country. They are also the group that basically spends every dime they make every month so losing $200 out of their monthly budget, it would be devastating to a lot of them, and that’s where the most challenge is. I talked to a number of analysts who are now with your industry and they say that if you are a young male today, you are going to pay two and a half times more than they did before. I don’t think that they’ll continue their healthcare coverage because they’ll argue it’s just not worth it, and whatever the fine is, the fine can only be charged against a consumer if they have money coming back on their income taxes. One of the people I’ve been talking to says there are more kids today, kids being in their 20s and 30s; they’re telling their accountants, I did not want to have an income tax refund. I want to pay only exactly what it comes out to because if I don’t have a refund, they can’t fine me whatever the fine is.
JIM: So there is going to be a lot of challenges, and it’s going to be interesting to see going forward how this all plays out. If we were to summarize what we’re looking at today, what do you see the state of the consumer going into 2014? Is it going to be a contraction? Is it going to be about the same, or do you see maybe a slow growth in consumer spending going forward?
BRITT: I think what you’re going to see is going to be driven probably 80% by the fears of healthcare costs. I would say if you didn’t have the healthcare cost issue over a shadowing economy, I think you probably would be seeing something like 2% or 3% growth this year just like last year. I think with the healthcare cost issues out there and people do not know what they are going to be paying for sure, even if they went on the website, the price they’ve got quoted may not be the price that they actually end up paying. That’s the other issue, so I mean, there is just so much uncertainty. The bottom line is uncertainty always results in less buying.
JIM: And there is the opportunity potentially. The U.S. economy obviously is the driver. I don’t know what effect this might have on overseas markets or what’s going to happen, but I think it’s more important than ever to pay attention to your investments, pay attention to your cash flows and make sure that you know where the money is coming in, where the money is going. Keep an eye on things for next year.
BRITT: Well I think so and the other issue is going to be, you have to realize if you look at the European model, we do work in Europe, that consumer basically has no money at the end of each month because their tax rates are so high they basically live from month to month, don’t have any money to save at all because they have a high tax rate. I mean, that’s what really worries me down the road. I think we’re looking at the potential of a 50% tax rate in America just to pay the debts off in a few years, and that would be devastating to future economies and future growth.
JIM: Now if people are interested in getting information from your firm, and I know you’ve been an author of a book, if people would like to get more information, where would they go for that?
BRITT: My website is argconsumer.com. You can go to Google and just type America’s Research Group with an apostrophe “s”, I show up thousands of times and I’ve written actually five books. My first book was called Predatory Marketing. My second book was called, It Takes a Prophet to Make a Prophet. My third book was called The Customer Rules. Actually I’ve written two Christian books since then, Already Gone and Already Compromised.
JIM: Well I really appreciate you sharing Britt. You have a wealth of knowledge and this ObamaCare thing that’s happening I know it’s going to have a tremendous impact on our economy. They say healthcare is somewhere around 10% of the total U.S. economy, so as this whole thing transitions, it is going to have an impact. Now whether or not that’s negative or positive or maybe a little bit of both remains to be seen as they try to work out the kinks, but I look forward to maybe having you on again in the future as this thing plays out.
BRITT: Thank you so much. Have a great day.
JIM: Thanks for joining us this week, and tune in again next week as we explore another phase of the Real Wealth process and remember if anything you heard in today’s show, you would like to get more information about, contact your Real Wealth Advisor. Also if you feel that any of this information would be helpful to a friend or family member, just click the forward to a friend box.