Card Volume Shows Vitality While Loans Stagnate

We are in a balance sheet slowdown: overleveraged households are tightening their belts, holding back on consumption, thereby choking off the economy's main engine.

Even as growth in inflation-adjusted personal expenditures appeared to approach a stall at an annual rate of 0.7% in the second quarter, however, the rate of growth in spending on credit cards and debit cards remained healthy.

An increased appetite for big-ticket items among households that are surviving the malaise appears to explain much of the phenomenon.

Through the recession and its aftermath, spending on Visa Inc. and MasterCard Inc. credit cards in the U.S. has tracked closely with spending on durable goods, excluding automobiles — that is, discretionary purchases of items like appliances and furniture that people are likely to put on plastic.

Overall consumption fell off a cliff during the recession, but the year-over-year contraction in spending on durable goods and purchases made with credit cards was even steeper at declines hovering around 10% for much of 2009 (see chart).

Now, growth rates in credit card purchases, at 8.8% from the previous year in the third quarter, and durables spending, at 5.6%, have leapfrogged overall consumption growth.

Cardholders have managed this without additional borrowing — the contraction in total credit card loans has slowed, but was still ongoing at a year-over-year drop of 2% in September, the most recent month available, according to the Federal Reserve.

That suggests that the spending is concentrated among a segment of the population that has been spared from chronic unemployment, whose balance sheets have enjoyed a partial recovery along with the value of their stock investments, and who tend to pay off their credit card balances every month.

Meanwhile, year-over-year growth in debit card volume never sank below 4.5% during the recession, a result widely attributed to the growing use of debit cards for essential purchases.

The growth rate in debit card volume has eased since a recent peak of about 17% in the first quarter of last year. But, at 11.6% in the third quarter, it remains well above growth in overall consumption, meaning that debit cards continue to account for an increasing share of transactions.

To be sure, wild swings in gas prices have also buffeted card volume, and watershed changes in regulation, like new restrictions on the fees banks can charge merchants to accept debit payments, are poised to disrupt growth trajectories.

Moreover, credit card lenders are anxious for an increase in receivables that might accompany a stronger rebound in spending.

The current cycle has substantially lagged the recoveries in retail sales and total personal consumption that followed deep recessions in the mid-1970s and early 1980s.

Nevertheless, earnings from transactions volume is essential to credit card businesses. For example, at Bank of America Corp.'s card operation, noninterest income accounted for almost 40% of revenue before losses on bad loans in the first nine months.

Having consigned many of the riskiest borrowers to runoff portfolios, the nation's biggest issuers have largely embraced customers who pay their bills in full each month and who are driving much of today's spending.