IN THE NEWS

🛍️ Walmart’s Cautious Outlook (NYT)

Explained:

• Walmart (WMT) has warned that shoppers are feeling the squeeze of higher prices, reporting strong results for the holiday shopping season but saying this year would be tougher sledding.
• The retail giant, which can provide a barometer of consumer demand, said sales would be muted in 2023 as shoppers navigate high inflation.
• Walmart’s revenue and profit grew more quickly than analysts expected for the three months through January, which includes the holiday shopping season. Its quarterly revenue of $164 billion was 7.3% higher than a year earlier. December was the best month for sales in history at Walmart’s U.S. stores despite inflation peaking at 41-year-highs last summer.

Why it matters:

• Walmart warned that it expected inflation would weigh on consumers. It’s a similar story at Home Depot (HD), which said profits would be slimmer this year.
• All told, the economic picture remains unclear. In January, job growth was strong, and consumers kept spending, though large corporations are warning the spending will decrease this year. Inflation is falling but remains elevated, and the Federal Reserve has raised its benchmark interest rate eight times since last March.
• Some key suppliers, like Procter & Gamble (PG) and Unilever, have said they would continue raising prices this year, forcing retailers like Walmart to choose between raising their own prices or seeing profit margins shrink.

COST OF HAPPINESS

Affording the American Dream

How achievable is the American Dream? It’s an emotional question at the core of our national identity.

To answer that, the Ludwig Institute for Shared Economic Prosperity (LISEP) has constructed a “Minimal Quality of Life (MQL) Index.”

While other affordability and inflation indexes tend to focus more broadly, LISEP argues that costs for the bare essentials, specifically housing, groceries, and health care, have jumped dramatically post-Covid.

LISEP found that this “true cost of living index” has risen over 49% more than the Consumer Price Index (CPI).

The real numbers

For all of us who live in the real world, beyond the all-encompassing benchmark calculations of central bankers and economists, it comes as little surprise to hear that day-to-day living expenses have risen considerably faster than the figures reported by government institutions.

We’ve seen it for ourselves, whether in skyrocketing egg or toilet paper prices at the store, surging prices at the gas pump, more expensive prescription drugs, or the worsening affordability crisis for housing in many metropolitan areas.

While the true cost of living has increased considerably in the last few years, that alone is not necessarily interesting since we all know that generally from our own experiences.

LISEP, however, goes one step further. They account for the basic recreational activities necessary to maintain physical and mental health by quantifying the costs associated with the “pursuit of happiness,” a fundamental aspect of the American Dream.

Calculating the MQL Index

To do this, they tracked the costs associated with seven of the most common recreational pastimes for families over the past 20 years, including eating out, watching TV, physical activity, and celebrating holidays.

There’s more to the promises of a middle-class lifestyle than just housing, groceries, and health care. LISEP hopes to capture the changes in affordability for these important experiential expenses.

It’s an ambitious undertaking. To discern eating-out costs, they used government-provided per diem data as a proxy for the cost of restaurant dinners. For entertainment costs, they monitored prices for basic TV services (with adjustments for transitions to streaming services).

For physical activity, they used adult sports equipment, such as bikes, helmets, and sneakers, to represent the financial burden on Americans just to stay active while measuring the cost of participating in school sports for children. They even tracked the affordability of local sporting events like minor league baseball.

And for family vacations, a critical aspect of many middle-class lifestyles, they tracked the cost of gas, tolls, and food for three days, hoping to reflect the iconic tradition of weekend road trip getaways.

Building on this, they also tracked costs associated with our favorite winter holidays, ranging from expected expenditures for one gift for each child and spouse in a household to decorations and a festive dinner.

Putting it all together

These are simple metrics that target the defining features of American middle-class life. The findings are fascinating: When adding these experiential costs from the Minimal Quality of Life Index to their True Living Cost calculations (housing, groceries, and healthcare), LISEP found that no family earning the median household income in 2021 of $70,784 could reasonably afford the inputs into the American Dream, nor could they in 2001, either.

Since 2001, basic recreational costs have risen 38%  for the average family, whereas the CPI for recreation only rose 19% over the same period. As a result, two in five American families can’t afford standard recreation activities.

Interestingly, eating-out costs have grown the most within the “pursuit of happiness” spending basket, with holiday gifts also becoming more comparatively expensive while TV subscriptions, thanks to streaming, take up a smaller portion of the typical family’s recreational spending.

For a family with two children, LISEP estimates that they would have spent roughly $3,323 on recreation in 2001, and today, they would spend over $5,000 — that’s more than a 50% increase in two decades.

Takeaways

Fortunately, the MQL index has actually been declining since 2013 in nominal terms, thanks to streaming packages that are much cheaper than cable. The TV component of the index fell from almost $750 per year in 2012 to $277 in 2021 — a 63% decline.

This huge decline in the largest part of our recreational expenses has dwarfed more modest increases elsewhere, such as children’s sports and 3-day trips.

LISEP still paints a stunning picture, telling us that the pursuit of happiness is unaffordable for many families. More surprisingly, it hasn’t been affordable for at least 20 years.

While CPI metrics serve a valuable purpose in interpreting price changes broadly in a systematic way, there’s good reason to question how well they reflect the realities facing everyday Americans.

For most of us, daily necessities and simple recreation costs that enable us to enjoy life have risen far faster than standard inflation figures capture.

Dive deeper

Check out LISEP’s resources on the MQL Index here to learn more.

SEE YOU NEXT TIME!

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