The U.S. Census Bureau published their numbers for July 2021 this morning. Unfortunately, the numbers do not bear well for the credit card industry, suggesting low consumer confidence and reduced spending.
- Spending in retail sales and food services (total) dropped between May and June by $9 million, landing at $634.6 million
The five worst categories versus May 2021 were “other clothing stores,” which align with small business (-13%), book stores [remember them? (-11.2%)], souvenir stores [No surprise (-9/6%)], department stores [think BNPL (-8.5%)], and household appliances (-7.3%).
The five best performing categories for the same period were Men’s clothing [indicating back to work (8.6%)], shoe stores (7.1%), “other general merchandise” (6.9%), new autos (6.9%), and auto dealers (4.8%).
Retail sales affect credit card revenue from several perspectives. First, when spending falls, so does interchange. Interchange, the merchant expense for using the payments network, generates noninterest fee income. Then, when spending drops, revolving credit tends to stagnate, which affects interest income. And, of course, credit risk can be an issue.
Remember that consumer spending drives 70% of the economy, so bells and sirens go off when that metric falls. For example, about 90 minutes after the Department’s announcement, the Dow Jones Industrial Average was down $268.86. More to come on that…
The WSJ noted the rise in COVID cases and pointed to “setbacks for some companies,” especially in the travel sector. They also pointed to Mastercard data, which is relevant.
- A Mastercard tracker of online and in-store spending shows that retail sales, excluding autos and gas, were up roughly 11% in July compared with the same month in 2020. Sales of apparel and jewelry each rose about 80% over the same period, while revenue at restaurants was up 61%, according to the tracker.
- Such trends represent “passion-led spending” as people resume their pre-pandemic activities, said Bricklin Dwyer, Mastercard’s chief economist.
- “We’ve seen people ready to move on with their lives and ready to continue to spend and get to whatever the new status quo looks like,” Mr. Dwyer said. People are spending on items they “really feel good about because you’ve had a lot of time to think on what you want to do when the economy reopens,” he added.
As credit managers start the 2022 planning cycle, there are some essential risk areas to consider. First, suppose COVID II mimics COVID I, as it affects employment, shopping, and small businesses. Do not expect CARES Act II to be as generous as CARES Act I. There is not enough money to go around, or the economy will head towards hyperinflation. As a result, the excellent credit losses you see today will not be sustainable.
With Inflation looming, expect recent optimism in the Fed’s Senior Loan Officer opinion surveys, indicative of expansion or contraction in lending. One swallow does not make a summer, as the old Greek saying goes, but retail sales numbers are significant to watch because they are indicators of upcoming credit performance.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group