NEW YORK–Consumers have been spending money as if the coronavirus recession is over, but they are also paying down old debts and avoiding new ones in case the pandemic lasts a while, according to one new analysis.
That’s the “discordant picture” that can be seen in the U.S. economy following Q3 earnings reports from some of the country’s largest credit-card issuers, the Wall Street Journal reported.
Capital One Financial Corp., Discover Financial Services and Synchrony Financial reported that, starting in September, the volume of purchases made by their customers increased from the relevant period a year earlier, a first since the coronavirus forced swaths of businesses to close their doors in March and a severe recession took hold, the Journal stated. The buying continued well after laid-off workers stopped receiving $600 a week in extra unemployment benefits at the end of July, the report adds.
“Although retail spending accelerated at the end of the third quarter, consumers still shied away from borrowing to finance everyday expenses and shopping binges. End-of-September credit-card balances at Capital One, Discover, Synchrony and American Express Co. were below their 2019 levels,” according to the Journal report. “Late-payment and defaults rates also decreased at those banks from prior quarters, even after programs that gave borrowers a reprieve on repayments ended, suggesting that consumers are willing and able to get out from under existing debt.”
‘The Biggest Disconnect’
During a conference call with stock analysts, Capital One CEO Richard Fairbanks said, “This is the biggest disconnect that I certainly have experienced in my three decades of building Capital One between what we see in the economy itself and the actual performance of the consumer.”
The Journal noted that even though purchase volumes are on the rise, what consumers are spending their money on is still shaped by pandemic realities. Among customers of Discover, purchases at grocery stores and retailers in the first half of October increased 16% and 26%, respectively, while spending on gasoline and travel decreased 19% and 49%, respectively. At American Express, online retail spending rose 32%, while offline retail spending fell 10%.
Additional borrowing hasn’t followed the additional spending. Outstanding U.S. credit-card balances fell 6% at Discover and Synchrony, 9% at Capital One and 28% at American Express.
‘Mindful of Obligations’
The decline at Discover was due to “a higher payment rate as customers continue to be mindful of their debt obligations,” along with a decline in promotional offers, finance chief John Greene told analysts last week, according to the Journal.
The report found higher payment rates also mean that the banks are losing less money to defaults. Net charge-off rates on Capital One’s U.S. credit-card balances fell to 3.64% at the end of the third quarter, down from a year ago when the economy was still growing. That improvement occurred even as the number of Capital One customers enrolled in forbearance programs declined.