Lower Delinquency and Increased Spending: Can Consumers Have It All?

Source: http://www.flickr.com/photos/ameriswede/

In the American economy, the consumer is king. Consumer spending accounts for as much as 70 percent of the country’s gross domestic product, and is the fuel that keeps the entire economic machine running. The ebb and flow of consumer demand and sentiment is closely monitored by both economists and investors because of its impact on corporate revenues — and a tepid consumer means a tepid economy.

There are any number of ways to measure consumerism. Gallup runs several surveys that track various facets of the U.S. economy, one of them being the average dollar amount that Americans report spending, or charging to credit, on a daily basis. The most-recent reading of this metric was $90. This is up from about $70 a year ago, and the highest average since October 2008, suggesting consumers are gaining confidence in the nation’s economy.

As indicated by the Gallup survey, consumers spend money in two ways. They either spend money they have, or money they don’t have: i.e. they charge purchases to credit cards or take out loans. To a business, one dollar is as good as another, so both ways are lumped into the same consumer spending metric.

On the first front, real personal income growth has remained fairly subdued over the past few years. Average earnings haven’t necessarily increased at a rate to justify substantial gains in consumer spending, placing an emphasis on credit.

RPI

Source: Data from the Federal Reserve Bank of St. Louis

The latest consumer credit credit report released by the U.S. Federal Reserve shows a substantial increase in the amount that Americans are borrowing. Total consumer credit outstanding increased 8.3 percent on the month in May.

In general, increases in consumer credit indicate growth in economic activity. When consumers borrow within their means in order to purchase a car, go to college, or buy a house, the economic engine putters on contently. The obvious downside risk is that when people borrow beyond their means, and assume too much debt relative to their income, they may be forced to stop spending simply to pay off debt. This is a negative economic catalyst.

Consumer Credit Outstanding

Source: Data from U.S. Federal Reserve

While an increase in debt may be concerning, more and more data suggest that Americans are finally mastering their spending habits. Overall consumer caution regarding credit cards has made itself evident in lower rates of late payments at major issuers. Late credit card payments to major issuers mostly declined in May compared to April, which means more people are using credit cards more responsibly.

An analysis done by FICO shows that average credit card debt in 2012 for people between the ages of 18 and 29 is $2,087, down from $3,073 in 2007. A law called the Credit Card Accountability Responsibility and Disclosure Act, passed in 2009, also made it more difficult for people under 21 to get a credit card, meaning that fewer young people are getting into debt. Net charge-off rates also declined for the month.

In addition to this, a report from the American Bankers Association seen by Reuters also shows that Americans are paying down their debt. A composite ratio tracking delinquency rates for eight different loan categories fell from 1.99 percent to 1.7 percent. This compares with a 15-year average of 2.37 percent. The delinquency rate on bank card payments fell to 2.41 percent, a 22-year low.

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