They assumed the economy would bail them out and the housing bubble buttressed that illusion. Credit card processors are again reporting rising credit volumes, but this time the purchases are for basic necessities as the price of gasoline and food stretch income-constrained household budgets.
The challenge is that this signals further weakness for the economy. If credit cards are a last resort, experience tells us defaults and slowed spending are sure to follow. The write-off hit to banks and retailers is one thing. But with 70% of the economy driven by consumer spending, the omen is worrisome. JL
Advertising Age reports via Bloomberg News:
Consumers in the U.S. are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices. The dollar volume of purchases charged grew 10.7% in June from a year ago, while the number of transactions rose 6.8%, according to First Data Corp.'s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior VP at First Data, the largest credit-card processor.
"Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food," said Mr. Tavares, who is based in Atlanta. "That's because there's been no other positive catalyst, like an increase in wages, to offset higher prices. It's a cash-flow problem." Rising costs of food and gasoline are leaving Americans less money to spend discretionary items, slowing the pace of the recovery, Mr. Tavares said. Household spending accounts for about 70% of the world's largest economy.
After-tax income adjusted for inflation fell 0.1% from January through May, according to figures from the Commerce Department. The drop came as Labor Department data showed energy prices rose 8.2%t and food climbed 2% during the same period.
The swings in purchases of fuel and food have been "dramatic," Mr. Tavares said. The volume of gasoline purchases placed on credit cards jumped 39% last month from a year earlier, compared with a 21% increase in June 2010, he said. Food shopping increased 5% after falling 7% last year.
The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Mr. Tavares said.
The figures are in synch with data from the Federal Reserve. Revolving credit, primarily credit card balances, increased by $3.37 billion to $793.1 billion in May from an almost seven-year low of $789.8 billion in April, figures from the central bank showed. The gain was equivalent to a 5.1 percent increase at an annual rate.
The use of credit cards is a "smoking gun" that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to "get by," said David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto.
"People on the margin are putting necessities on their credit cards and this is a trend that's very consistent with what lower-end retailers have been saying about their paycheck cycles," Rosenberg said.
Core customers of Bentonville, Ark.-based Wal-Mart Stores are "cash strapped," William Simon, U.S. stores chief, said at a June 15 conference hosted by William Blair & Co. "The paycheck cycle is severe."
Similarly, customers of Matthews, North Carolina-based Family Dollar Stores are living "paycheck to paycheck," so when gas or food prices go up, "they don't have the cushion that many others might have," Chairman-CEO Howard Levine said on a June 29 conference call.
Changes within the industry may account for some of the recent stabilization in outstanding revolving credit as several banks have ended incentive programs for debit cards, while increasing credit-card solicitations this year, Mr. Tavares said.
A possible bright spot is that inflation may moderate as prices of commodities stabilize, Fed Chairman Ben S. Bernanke said July 13 in his semi-annual testimony to Congress. As of July 19, the average price of a gallon of unleaded gas had dropped 7.6% from May 4, when it reached an almost three-year high.
"The anticipated pickups in economic activity and job creation, together with the expected easing of price pressures, should bolster real household income, confidence and spending," Mr. Bernanke said.
Confidence has a long way to climb for those in the lower-income brackets. The sentiment gauge for those making less than $15,000 a year was minus 66 in the week ended July 10 and was minus 69.6 for those earning $15,000 to $24,999, according to the Bloomberg Consumer Comfort Index. The comparable reading for households making more than $100,000 was minus 1.4.
"For people to think that this rebound in credit-card usage is actually a sign of resurging consumer confidence, I think they're looking at the situation backwards," Mr. Rosenberg said.
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