Holiday 2018: The Credit Card Christmas

With Black Friday just 17 days away, we’re going to be focusing on the health of the US consumer over the next 2 weeks this section. The headline stuff you already know: unemployment is low, wage growth is picking up, and consumer confidence is very high. It should be a great Holiday season for retailers.

Those oft-mentioned data points miss an important factor in consumer spending, however, because the real engine of marginal US Holiday purchases is credit card debt. Data from the Federal Reserve shows this clearly enough. For example, last year US credit card balances rose by $44 billion (6% of total outstanding) from October to December. US consumers then paid off (most) of their incremental balances with tax refund checks the following February/March. This is a reliable seasonal pattern, visible every year.

Now… the setup going into Holiday 2018 does look a little scary. US credit card debt totals $798 billion as of September, up 8% from last year and a fresh all-time record. Worth noting, however: credit card debt did flat-line from 2011 to 2014 at $610 billion. Clearly, Americans are making up for lost time now that they finally feel the domestic economy is robust.

So what does the most recent US credit card-related data tell us about the state of the US consumer and the prospects for a happy Holiday season? Good news on that front:

  • After a pickup in delinquency rates from Q1 2015 (2.1%) to Q3 2017 (2.5%), these are now stable at 2.5% for Q2 2018 (latest data available). Also worth a mention: delinquency rates remain far below their prior cycle lows of 3.5% (Q3 2005) and 3.3% (Q3 1994).
  • Credit card users have been able to maintain low delinquency rates despite much higher interest rates. The average credit card rate is currently 14.4%, up from a low of 11.8% in August 2014.
    Moreover, rates are actually higher than at any point in the last cycle (2002 to 2008) and fast approaching the +15% common in the 1990s. And yet balances are (much) higher and late payments are (much) lower than those periods.
  • Recent trends in balances have shown slower growth as the year has progressed (4.8% year-on-year in Q1 2018, 3.8% in Q3), indicating consumers have been somewhat conservative coming into Holiday 2018 so they can potentially spend more during the season.

Bottom line: credit card data supports the positive take on the US consumer from more traditional economic indicators. Higher interest rates have neither caused an increase in delinquencies nor a reluctance to use credit. One can argue that the American economy is too reliant on credit generally and personal credit card expenditures in particular. And that will matter eventually. Just not during Holiday 2018.

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