Credit Card Balances Still Declining But U.S. Consumer Spending Trends Point to a Gradual Recovery

DBRS, Inc. (DBRS Morningstar) published a commentary analyzing recent trends in U.S. credit card balances and consumer spending. Since the onset of the Coronavirus Disease (COVID-19) pandemic, credit card balances have contracted substantially at a rate not seen since the aftermath of the 2008 Financial Crisis. The recovery of credit card balances in the intermediate-term is likely to be uneven until the economy fully reopens and the labor market starts approaching more normal levels.

Key highlights include:

-- We expect the observed contraction in total consumer and credit card spending to remain a headwind for credit card balances in the near-term.
-- In the early phase of the coronavirus pandemic that was accompanied by lockdowns and stay at home orders, overall consumer spending stumbled. However, since June, consumer spending for goods (including retail sales) has exceeded pre-pandemic levels while consumer spending for services remains depressed causing a drag for the overall consumer and credit card spending.
-- The Federal Reserve Bank of New York's (FRBNY) August 2020 Survey of Consumer Expectations indicated that consumers' forward expectations for spending have improved meaningfully since last March and April. Importantly, spending expectations have also improved from the onset of the pandemic for all three key income groups. These improving expectations for consumer spending should also have positive ramifications for credit card spending.

“In our view, the catalyst that would propel sustained credit card balance and spending growth would be a vaccine that allows for the return of indoor activities, large gatherings and travel. Highly effective therapeutics would also help facilitate growth in spending. Further, the magnitude of credit losses and the card issuers' risk appetite will also constitute key determinants for the pace of recovery of credit card balances. With consumer spending comprising approximately 70% of U.S. GDP, a return of volume growth would be a positive for the overall economy,” said Yanni Koulouriotis, Vice President, U.S. Non-Bank FIG

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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