Why Are Consumers Spending Less?

In this episode of MarketFoolery, host Chris Hill chats with Motley Fool senior analyst Jason Moser about some big business news. Bank of America's (BAC 1.53%) stock popped a little bit on a good earnings report, and the bank continues to impress with its success in digital ventures.

United Airlines (UAL 5.50%) also popped on earnings, but the shadow of the 737 Max still looms large over the whole airline industry. Plus, the guys dig into some data on monthly retail sales -- what it says about the economy these days and the economy to come this holiday shopping season -- and some unique challenges that retailers will have to face these next few months. Listen in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 16, 2019.

Chris Hill: It's Wednesday, October 16th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Jason Moser. Thanks for being here!

Jason Moser: Hey, hey!

Hill: Happy times in the greater metropolitan Washington, D.C. area!

Moser: Happy, happy, happy! Man, this is on top of the WNBA championship, the Stanley Cup just a couple of short years ago. It makes you even wonder why do we even have a football team here? Is there a football team? Does that qualify as football at this point? 

Hill: They're taking a backseat, as they should. Congrats to the Nationals, going to the World Series. We've got some earnings. We've got some... I was going to say interesting. It is interesting. We've got some interesting retail sales data. We'll get to that in a second. 

Let's start with Bank of America, though. Third-quarter profits and revenue came in slightly higher than expected for Bank of America. You tell me, what's working better for Bank of America right now? Is it the consumer-banking side? Or is it the investment-banking side?

Moser: Well, the numbers would tell you that the investment-banking side of the business is performing well and was responsible for a lot of these results. Now, if we look back last quarter, we were talking about how, on the surface, a lot of these banks were dealing with a challenging environment, just given the interest-rate environment, given the uncertainty with the ongoing trade war, market volatility that results from all of this. Banks were really having a bit of a challenge there. It does show you the advantage that the big banks have in their scale. But when you look at this quarter, it wasn't just the investment-banking side, but certainly that was the star of the quarter. Heck, even in consumer investments, accounts grew 7% from a year ago. 

But all in all, the bank is performing very well. Consumer-banking revenue was up 3%, loans grew by 7%, deposits up by 3%. Consumer checking accounts up 2.3%, their highest total in 10 years. They're getting contributions from all sides of the business. 

But I tell you, what really struck me going through the report here and the accompanying presentation is the investments that they're making in digital, and the success that they're realizing on the digital front. It's not surprising, I guess, but I think it goes unnoticed because of the threats that we talk about quarter in and quarter out from all of these tech Silicon Valley-based companies like Square, Stripe, PayPal and whatnot.

Hill: It's interesting because for the longest time, the narrative with Bank of America, more so it seems to me than the other big banks, it seems like they had the longest hangover from the Great Recession -- in part because of that horrific Countrywide acquisition that they made.

Moser: It was a dark cloud. I was working there for a spell during that time. It was so amazing to see the attitude when that acquisition was made, and the enthusiasm -- it was unbridled enthusiasm, Chris. Really, the feeling there was that Bank of America was taking over the world. Ken Lewis could do no wrong. The sky was the limit. And then you crack open the books there, and it wasn't exactly as good as we thought it would be. 

But going back to this investment in digital, I really want to shine a light on this. We talk a lot about Square and PayPal and this war on cash. Bank of America is investing a lot in this and it's paying off. They have 38 million digital users now. We don't talk a lot about Zelle. I've personally never even used Zelle. We have Bank of America accounts in our family. Now, that doesn't mean Zelle isn't doing well here, though. When you look at the numbers they're turning in, transactions for Zelle, they have 8.9 million users now. Came in just under 81 million person-to-person transactions for the quarter. That's close to double what they chalked up a year ago. When you talk about the dollar volume flowing through those networks, $21 billion went through that network for the quarter. That's almost double from a year ago. So just because I'm not using it doesn't mean it's not being used. I think it's a good lesson for investors to remember -- don't just take your worldview and extrapolate that to the greater market.

Hill: You've got your family's money with Bank of America. My family, it's Capital One. The most recent conversation I had with someone at Capital One, Zelle came up. It was like, oh, OK.

Moser: What was that conversation? 

Hill: At one point I said, "Wait, is this your Venmo?" And the guy was like, "Well, yeah, kind of." And I was like, "OK." I thought, that's smart, that they're trying to do this. All things being equal, I think it's a good thing that banks are looking to change with the times.

Moser: Yeah, I agree. Recently, there was this report, I think it was an Accenture report that was talking about this land grab out there in the payments space as the cost of moving money around is coming down, and there are companies out there that are capturing that. There were opportunities that these big banks were missing. Part of that rang true. It's also worth remembering that there are efficiencies that are being wrung out of the system here. It's not like that money is going from one bucket into another bucket. A lot of times, that efficiency is creating a little bit more of a streamlined market. But there's no question that the big banks are trying to get in there and capture their share of that payments space. It does look like Bank of America is gaining a lot of traction.

Hill: Stock up a little bit. Shares of United Airlines up a little bit this morning, as well. Third-quarter profit came in at $1 billion. That was a little bit higher than expected. Revenue was even with expectations, but they raised guidance for the full year. I would point out that United Airlines is doing this without the 737 Max.

Moser: As most all major airlines are, thankfully. I don't know that I want to be hopping in one of those things anytime soon. I've got a couple of flights coming up here in the near future. Airlines are really interesting. On the one hand, I personally have never had any interest in investing in them. They always seem a bit too capital-intensive and beholden to certain regulatory or macro concerns that are beyond my control. But airlines often make me think of companies like Comcast. What I mean by that is, if you only paid attention to what consumers say, if you just scroll through social media, search "Comcast customer service," I'm willing to bet that 99.9% of that is all total hate. People just don't like Comcast. The customer service is horrible, whatever, yada yada yada. I don't have Comcast, I can't speak to it. But my point is, there is this vibe out there on the consumer side where people don't like companies like these. When it comes to airlines, most of what you're going to see is people complaining about canceled flights, delayed flights, expensive seats, getting kicked off their flight, whatever that may be. But when you look at it from the actual business side, there are a lot of reasons to actually consider investing in businesses like these. These are companies that offer up a lot of opportunities simply because of the competitive positions in their respective spaces. The spaces they serve are really important. And I think the numbers bear that out. If you bought shares of United five years ago and you're owning them today, you're sitting on 15% annualized returns. Your money has doubled over the course of the last five years. I think that's for a number of reasons. Clearly, it's an airline with scale. They can invest the resources wisely. Fuel costs have been relatively low. They expect to increase capacity by 3.5% this year. That core metric, revenue per available seat mile, grew 1.7%. That was in line with their forecasts. They do see this metric hanging in that area for the rest of the year. So, I think they set good expectations. They raised their guidance a little bit. The big unknown is that 737. Nobody knows. I think everybody would opt for safety first.

Hill: Absolutely. But I think that it's this other layer of uncertainty within the airline industry. And it's not evenly distributed. Some airlines have a much greater exposure to the 737 Max, and therefore, they have more planes that are grounded. In a way, it makes it a little bit harder to judge -- if you're looking at all the airlines and thinking, "Well, yeah, these are better-run businesses. Buffett, who hated airlines forever, has bought shares of a bunch of them, so I'm going to try and figure out which ones to buy," I feel like it's a little bit more difficult just because, again, that exposure to the 737 Max is not evenly distributed. Delta Airlines doesn't have nearly the exposure that United or Southwest does. In Delta's latest quarter, are they doing really well relative to the competition? Or are they just doing well because they don't have the exposure, and once the 737 Max gets fixed, all of a sudden, United and Southwest have capacity that they didn't have before?

Moser: Yeah, I think that's a really good point. I think United and the other airlines that depend more on the 737, for the most part, they've gotten out in front of it. Instead of waiting for problems to arise, they've gone through, adjusted their schedules, cancelled a lot of flights that were going to be dependent on this. From that perspective, you could say, their earnings, their profitability, their potential is probably a little bit depressed right now. The market clearly knows that. Then you have to try to make a judgment as to how much credit is the market giving it for, when the time comes that the 737 issues are fixed, and everything is getting back to normal, and airlines like United are able to integrate more flights back into their rotation. Clearly, the market's assuming at some point, they will. It's a matter more of when. That really is a guessing game. It's very difficult to say there. But either way, if you're looking at investing in airlines, United clearly looks like a very well-managed company. They've been focusing for a long time here on trying to return value to shareholders in one form or another. Share repurchases have been a really good and effective way for them to do that. They've bought back more than $8 billion in shares since 2014. They have a balance sheet in good shape. Operating earnings cover that net interest expense six times to seven times over on a fairly consistent basis. And they make healthy amounts of cash along the way, too. Airlines are notoriously difficult, but well-run airlines can certainly offer opportunities for investors.

Hill: I'm glad you mentioned that because Oscar Munoz and his team are doing a good job with this. Despite the run of this stock, it still doesn't look all that expensive.

Moser: No, it doesn't. You're right.

Hill: Monthly retail sales number came out. Normally, I don't pay a lot of attention to them. Retail sales in September fell 0.3%. That certainly doesn't seem like a big number, but it's the largest amount since February. And I think I have this right -- e-commerce sales fell month over month. That's a little surprising to me.

Moser: I think that's also based on a forecast of something around two-tenths of a point expansion. It doesn't sound like much on its own, but when you compare that to the actual expectations, it becomes a little bit more... I don't want to say concerning, but it's enough to get it on the show today.

Hill: Yes. And as we point out from time to time, this is one of those months that matters a little bit more than others. You think about incorporating back-to-school shopping in August and September. That's the second most important time of the year for retailers.

Moser: Yeah. We saw some retailers really capitalize on that. We were talking a couple of weeks ago [at] Motley Fool Money about Nike. They said in the call, they were like, "Hey, listen, we had one of the most successful back-to-school seasons ever." So it's not to paint this picture of all retailers suffering. But we're going into a very pivotal time of the year. We're out of back-to-school season and now we're getting into the holiday season. I'm not going to make a call here in saying that this is going to happen. I wouldn't be surprised, though, if we are headed for a tougher holiday season than maybe some were thinking a few months back. I think we're going to see trade concerns and costs playing into consumers' decision-making process a bit more this year vs. last year. Last year, the assumption might have been on the consumer front that, "Oh, trade war, big deal, it's just a news cycle. That'll be fixed before you know it and everything will be status quo." I think what we're coming to find now is that this trade war is not something that's going to be ending anytime soon. And I think most of that is for political gain.

I think we're coming into a very pivotal election season. I think politicians are really trying to milk this thing for all it's worth. But what that ultimately is resulting in is, you're seeing a lot of retailers, you're seeing a lot of businesses right now -- small businesses, particularly -- that still have the uncertainty that this trade war presents. They're raising prices because they just don't fully know exactly how this is all going to shake out. And as you raise prices, that typically puts a little bit of a stranglehold on consumer behavior. There's data out there that says that, hey, while consumers are feeling on the whole pretty good about things, unemployment is low, wages are kind of stagnant. People aren't feeling perhaps as good as they want to feel. There's some really interesting, some telling data out there regarding the state of consumer credit card debt today. There was one data point that struck me as pretty fascinating. If you look across this spectrum of household wealth and how much credit card debt these households have, households with the lowest net worth -- zero or even negative -- they're the ones that hold the most in credit card debt. Over time, this has only gotten worse. Ultimately, today, the average American holds 50% more credit card debt than they did a decade ago. And ultimately, that's the fuel. That's the fuel that goes into this retail economy. It doesn't go on forever. At some point, you run out of fuel, and you need to either fill that tank up with higher wages or an economy that is offering individuals more, whether it's in better jobs or more investment churn -- however that may be, wealth creation needs to come around. If you run out of fuel, that retail economy starts to come to a halt. I wouldn't be surprised if we see a bit more of a conservative consumer this holiday season, particularly based on where we stand today on credit card debt.

Hill: One more reason we say that retail is hard is, part of retail is managing your inventory. As these retailers look to see to what extent they can pull levers on pricing, they also have to factor in their level of inventory. And let's face it, some of them are better than others when it comes to managing their inventory. 

Moser: Yeah, there's no question. The younger companies that were built on technology, that are better at using data, better at collecting data and using that data for decisions, they're going to have an easier time of it, but it's still not going to be easy. Any which way you cut it, if you're an executive or some higher-up at any retail operation, this has got to be a real challenge right now, trying to predict what you think are going to be appropriate retail inventory levels here for the coming months. You're right -- depending on the nature of your business, after that holiday season is over, some of that inventory becomes almost worthless. And of course, that ends up crunching margins in a big way. You'll see that play out in the following year. The market's not stupid; they start seeing that stuff well in advance. This is going to be a really telling holiday season, I think, from a number of angles.

Hill: Jason Moser, thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Nationals fan extraordinaire Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!