Consumer spending slide clouds banks' second-half outlook

Bankers have been hoping that consumer spending will continue to bounce back, but they may need to temper their optimism amid the spread of the delta variant.

Surging COVID-19 case counts are weighing on consumer confidence, recent data indicates, which could dash the prospects of a sustained purchasing spree.

“Household concern is rising sharply,” Joel Naroff, president of Naroff Economics, wrote in an analysis Tuesday, “and if those worries persist, we could see some scaling back of spending.”

Any pullback in consumer purchases is likely to cause particular concern at credit card issuers, which have struggled with declining balances during the pandemic. Many consumers used government stimulus payments and the savings they accumulated while they cut back on spending to pay down debt.

Early this summer, the tide was starting to turn. In July, U.S. payments volume on Visa-branded cards was up 23% from the same period a year earlier, reflecting consumers’ greater willingness to spend as vaccination rates rose. When banks reported their earnings in July, executives were hopeful that higher credit card spending was starting to outweigh the elevated rates at which customers have been paying off their balances.

But several more recent indicators point to a deceleration in consumer spending that is likely to play out differently at the top and bottom ends of the income spectrum.

While many financially stable households may pare their spending voluntarily amid concerns about the delta variant, lower-income families could be forced to tighten the purse strings as government stimulus programs wind down.

Visa disclosed in a securities filing Friday that its U.S. payments volume between Aug. 1 and Aug. 28 was 21% higher than during the same period last year, which weighed on the size of the improvement for the second quarter. Visa's payments volume on U.S. credit cards, which was up 30% in July in comparison with the same period in 2020, grew by a somewhat more modest 26% during the first four weeks of August.

Consumer confidence fell in August to its lowest levels since February, the Conference Board said in its most recent index. Consumers’ intentions to spend money on homes, automobiles or major appliances cooled last month, though more consumers said they planned to take a vacation in the next six months.

The softer consumer outlook is playing out in a number of sectors. Retail sales dipped by 1.1% in July. Restaurants had been one of the bright spots in the July retail sales report, but more recent data from OpenTable suggests that concerns about the delta variant have made Americans more reluctant to dine out.

The number of seated diners at OpenTable restaurants was down 9% over the past week compared with 2019 levels, and they have been trending downward since earlier in the summer.

In August, the number of travelers who passed through Transportation Security Administration checkpoints was down by 22.8% compared with the same period in 2019. The year-over-year decline in July was 20.3%. Southwest Airlines recently cut its revenue guidance, citing a drop in travel bookings and a rise in trip cancellations.

In the last full week of August, hotel occupancy rates fell to 61% from 70.1% in the last week of July, according to the market research firm STR. A big decline was not unexpected, given typical seasonal trends and the return of in-person schooling, but renewed worries about COVID-19 also appeared to be a contributing factor, according to the firm.

To be sure, a repeat of last year’s plunge in consumer spending is widely seen as extremely unlikely.

While bank stocks have sold off in recent weeks, apparently due in part to concerns about the delta variant, the decline should be temporary because “the rise in COVID cases may not impact consumer spending as much as feared,” Deutsche Bank analyst Matt O’Connor wrote in a note to clients.

Bank executives will have an opportunity to comment on recent consumer spending trends — and to share their broader expectations about third-quarter earnings — during appearances this month at investor conferences.

Meanwhile, economists are wondering whether the recent slowdown in consumer spending is the start of a new trend. “The next month or so, I think, is going to be very telling,” Naroff said.

American consumers are “desperate for a return to normalcy,” and their risk tolerance has changed, so people whose financial positions have improved since the pandemic will be looking for ways to spend, said Colleen McCreary, the chief people officer at Credit Karma.

Still, a large chunk of Americans have been less fortunate, and the end of pandemic relief programs — expanded unemployment benefits are set to expire this weekend — figures to worsen their plight. In an August survey by Credit Karma, 49% of respondents said they are financially prepared for a second wave of the pandemic, but 28% said they are not.

The gradual decrease in stimulus spending this year contributed to a 17% drop in income during the second quarter for households that experienced housing, food or health care-related insecurities, according to a report from the Financial Health Network. In households that did not have those difficulties, incomes stayed roughly flat.

Households with kids are getting some relief from expanded child tax credits, but the data makes it “clear that there is a portion of the country that is now on a trajectory that is potentially very negative,” said Rob Levy, vice president of research and measurement at the Financial Health Network.

Paradoxically, those more vulnerable families may be forced to put more of their spending on credit cards, which could help bolster balances across the industry.

Households that do not feel financially stable will potentially find themselves in a situation “where credit cards are a lifeline” for their basic needs, McCreary said.