US consumers say they are worried about the state of the economy but that has not stopped them from pulling out their credit cards.
Consumer spending on debit and credit cards at Bank of America last month surged 20 per cent compared with last year and 28 per cent compared with November 2019, according to the bank’s data. That compared with an average annual growth rate of roughly 10 per cent in 2018 and 2019. Spending accelerated in the second half of the month, even after US consumer sentiment plunged to the lowest level in a decade. It improved slightly this month, primarily due to hopes of higher wages, according to data released Friday, but remains cautious.
“If you look at consumer confidence in terms of what they do with their money, no matter what they say, they are out spending,” Bank of America chief executive Brian Moynihan said at an investor conference this week.
Other large US banks, including Wells Fargo and Citigroup, reported strength in spending. Recent credit card spending at JPMorgan is 17 per cent higher than pre-pandemic levels, driven by growth in all categories except for airlines, chief operating officer Daniel Pinto said.
“I think there’s a lot of folks just trying to do their best to live a normal life and kind of make up the lost ground,” said Brendan Coughlin, head of consumer banking at Citizens Bank, the 13th largest US bank by assets. “It’s hard to model emotion.”
Debit and credit card spending at Citizens is running 12 per cent and 25 per cent higher than pre-pandemic levels respectively.
“The rate of spending far exceeds any reasonable estimate of what inflation has contributed,” Coughlin said.
Bank executives and economists are struggling to make sense of resilient consumer spending in spite of deteriorating sentiment. The two closely watched economic indicators usually move in lockstep with one another, according to research by the University of Michigan. Now that the trends are diverging, consumer behaviour is harder to predict.
“A lot of the macro relationships that we were accustomed to have been scrambled around by the pandemic,” said Tendayi Kapfidze, head economist at US Bank.
“Economic papers coming out of this are going to look at which relationships held up, which relationships were changed for a short period of time, and which relationships were changed permanently.”
Pent-up-demand for goods and services, a tight labour market and widespread supply chain issues have driven inflation to increase at the fastest pace in three decades. But, so far, companies have not had a hard time passing those expenses on to customers.
“In terms of the middle market customer, many have pricing power that they say that they’ve never seen before,” Wells Fargo chief executive Charlie Scharf said at the conference. “They say: ‘We’ve never been able to raise price like this and get it’ and they’re getting it.”
US consumers are using their elevated cash balances to absorb price increases rather than curb their spending. Checking account balances are still on average 20 to 35 per cent higher than pre-pandemic levels, executives said. Even for lower-income consumers who are starting to wear down their excess savings, expected wage inflation and ample capacity to borrow is likely to continue driving consumer demand higher into next year, Kapfidze said.
Demand for credit in the US rebounded to 2019 levels last month after falling sharply as most consumers spent the early stages of the pandemic paying down debt, according to the most recent credit access survey by the Federal Reserve Bank of New York.
Pinto said 70 per cent of JPMorgan’s credit card customers, who typically carry a balance from month to month, have run through their excess savings. He added that he expects card borrowing to accelerate over the next few quarters.
Consumers could be assuming that the federal government will again bolster household balance sheets with direct payments rather than let the economy slip into a recession as the new Omicron variant threatens to set back the recovery, executives said.
Alternatively, the higher spending could reflect a normal level of holiday spending that was pulled forward due to concerns over supply chain shortages, they added.
While the combination of higher prices and persistent demand will boost the economy over the short term, bank executives said they were concerned inflation could run too hot and said the Fed should move quickly, but carefully, to cool down the economy.
“There’s certainly a case to be made that [the Fed] should be moving faster than they’ve been moving,” Wells Fargo’s Scharf said. “We are more concerned about inflation than not but there is a path forward.”