A Look At The Trends Affecting Holiday Spending, Impact On Credit Card Companies

December 5th, 2014 by Trefis Team
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The holiday season is characterized by high levels of consumer spending in the U.S., and as a result credit card companies benefit significantly from these 40-odd days of the year. For retailers, Thanksgiving weekend accounts for about 30% of total  holiday season sales. [1] The weekend is generally considered a barometer to gauge the consumer spending sentiment during the shopping season. This year, retailers have already reported around a 6.4% year-over-year dip in average consumer spending during the weekend. [1]

In this article we look at several economic parameters in the U.S. to better understand the prevailing consumer spending sentiment. We also discuss the prospects for credit card companies  – MasterCard (NYSE:MA), Visa (NYSE:V), American Express (NYSE:AXP) and Discover (NYSE:DFS) – during the fourth quarter of 2014.

See our complete analysis of MasterCard | Visa | Discover Financial | American Express

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Conditions Promising

Continuing on an upward trajectory, the consumer sentiment index rose to 88.1 on the University of Michigan – Thomson Reuters Survey of Consumers report for October 2014. [2] This was the fourth consecutive monthly gain on the back of improving economic conditions. After a poor first quarter, increasing private wages and salaries have driven personal income higher this year. Both personal income and disposable personal income have risen at around 0.2-0.4% month-over-month for the past two quarters. Personal consumption expenditures (PCE) have also risen during the first three quarters of 2014. After growing at 0.5% in August over July, PCE remained flat in September before picking up momentum to gain 0.2% in October. [3] Higher expenditures indicate a rise in spending by consumers.

Declining Unemployment

There has been a consistent drop in the unemployment rate this year, as new job creation has accompanied economic growth in the U.S. For the first time after 2008, the unemployment rate fell below 6% in September this year. [4] The table below shows how the unemployment has steadily fallen over the past six months.

(2014)

May

Jun

Jul

Aug

Sep

Oct

Unemployment Rate (%)

6.3

6.1

6.2

6.1

5.9

5.8

Consumer Credit Outstanding

During the first two quarters, consumer credit outstanding grew 6.6% and 8.2%, respectively. In the third quarter it grew by another 6.6%. Revolving credit has also seen robust growth this year so far. After a slowdown due to harsh winter conditions earlier this year, revolving credit grew at over 6% in the second quarter, and the preliminary data suggests around 3% growth in the third quarter. After posting 8% growth in July, there has been a slowdown in August and September. [5] We expect this to improve in the final quarter of the current calendar year, as consumer spending picks up during the holiday shopping season.

Holiday Shopping – Early Trends And Outlook

Early trends have indicated a decline in sales and consumer spending during the holiday season, despite most of the conditions favoring growth in spending. Cheaper gasoline prices as well as the aforementioned improved parameters failed to entice consumers to spend in the beginning of this year’s holiday season. However, some of this is due to the declining importance of Black Friday at brick-and-mortar stores relative to the holiday season, with online shopping picking up. Following Thanksgiving weekend, sales on Cyber Monday were 17% higher than the previous year. [6] [7]

Credit card companies are optimistic about their performance during the quarter. According to a survey conducted by Discover, the company anticipates better spending as consumers are showing improved enthusiasm with pre-planned budgets for the holiday shopping season compared to the previous year. [8] MasterCard’s monthly Spending Pulse report for the month of October also pointed towards a steady gain in consumer confidence. According to the report, retail sales continued to grow in October and the momentum is likely to be sustained during the holiday season. [9]

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Notes:
  1. U.S. holiday weekend store sales fall on early discounts, online growth, Reuters [↩] [↩]
  2. Survey of Consumers, Thomson Reuters-University of Michigan, November 2014 Press Release [↩]
  3. PERSONAL INCOME AND OUTLAYS, OCTOBER 2014, Bureau of Economic Analysis [↩]
  4. Bureau of Labor Statistics [↩]
  5. Consumer Credit, November Release Federal Reserve [↩]
  6. Bricks-and-mortar sales edge lower at start of holiday season; online surges: data, Reuters [↩]
  7. Cyber Monday Shatters Record, Huffington Post [↩]
  8. Shoppers Are Budget Savvy This Holiday Season, Discover Press Release [↩]
  9. October SpendingPulse: Positive Growth Heading Into Holidays, MasterCard Press Release [↩]