Editor's note: These days, headlines are filled with stories about the struggling consumer. But Vic Lederman – the editorial director of our corporate affiliate Chaikin Analytics – dug deeper to really understand how consumers are holding up. In this piece – originally published in yesterday's Chaikin PowerFeed e-letter – Vic explains why the latest numbers are better than most Americans have been led to believe...
Here's What Credit-Card Companies Are Saying About U.S. Consumers By Vic Lederman, editorial director, Chaikin Analytics
Regular readers know I've tracked one narrative closely throughout 2024... Consumers are nearing a breaking point. That statement worries me... But like a lot of topics, the media tends to exaggerate this one. As I told Chaikin PowerFeed readers earlier this year, the numbers don't support this narrative. Total consumer debt in the U.S. hasn't changed much over the past 20 years. And when you account for inflation, U.S. household debt is still well below the all-time highs of the late 2000s. Of course, the outlook for consumers is constantly evolving. So I took a close look at the latest earnings from two of America's biggest credit-card companies – Capital One Financial (COF) and American Express (AXP). What I found might surprise you... Keep in mind that these companies have a front-row seat on U.S. consumers. And their earnings reports can give us an early warning sign if trouble is brewing. To keep it simple, I've broken down my findings into three basic takeaways... 1. U.S. consumers are spending more. Capital One said its cardholder purchases grew 5% year over year. American Express reported a 6% increase. Notably, these growth numbers are stronger than the latest economic data. Last week, the U.S. Department of Commerce reported consumer spending rose 3.7% year over year for the third quarter. That's the highest growth rate since early 2023. 2. Credit-card balances are rising. At Capital One, credit-card loan balances rose 6% versus a year ago. And American Express said its outstanding loans to cardholders jumped 14%. These rising balances could be a sign of consumer stress. But American Express caters to higher-income folks. So the big increase is more likely a sign that folks are more comfortable carrying some short-term debt. It's also worth noting that those higher balances will translate to higher interest income for both companies. 3. Delinquencies and defaults are rising very slowly. If you're looking for signs of trouble, there are two key metrics to watch – 30-day delinquency rates and net charge-off rates. The first tells us whether folks are paying their bills on time. And the second is the percentage of loans the company has written off as a loss. Capital One's delinquency rate was roughly 4.5% last quarter. That's up slightly from 4.3% a year ago. Those numbers are above pre-pandemic levels around 4%, but not by much. Meanwhile, American Express' latest numbers showed a 1.3% delinquency rate. That's unchanged from last year. Similarly, in the third quarter, Capital One saw a slightly higher charge-off rate of 5.6% compared with last year's rate of 4.4%. But that number was down versus the second quarter of this year. And the company reduced its provision for credit losses. In other words, Capital One is seeing fewer defaults than it expected a few months ago. American Express' charge-off rate was 1.9%. That's barely above the 1.8% rate from the third quarter of 2023. When you add everything up, there aren't any red flags... The worst number is Capital One's 5.6% charge-off rate. But that isn't a big problem considering the company is collecting interest rates above 20% on the rest of its outstanding loans. It's also worth noting that both companies' stocks hit fresh highs in recent weeks. Of course, these numbers don't mean every consumer is doing great. Based on Capital One's results, roughly 5% of its customers are struggling. In fact, Capital One's CEO noted in the earnings call that folks at the lower end of its customer base – in terms of both income and credit score – are holding up well. The company is seeing more pressure on folks with "prime" credit scores. Again, I don't want to dismiss the fact that some folks are struggling... Inflation has put pressure on everyone's personal finances. And when you add a surprise shock like getting laid off or experiencing a major health issue, it can be overwhelming. Credit-card companies have millions of customers. No matter what, some of those customers are going to run into trouble paying their bills. We're seeing that percentage increase a bit lately. But when you look at the long-term picture, we're back to normal levels in terms of defaults on credit-card bills. Take a look...  Folks, the media is always full of scary headlines – whether they're about the strength of the U.S. consumer or something else. If you're like me, you can't help but click on some of them. But in this case, they're nonsense. I'll admit it – I'm surprised at how well U.S. consumers are holding up. The latest numbers are downright impressive. Keep that in mind the next time you click on a scary headline. Good investing, Vic Lederman
Editor's note: While consumers are holding up better than expected, many investors are still acting foolishly with their money. That's why Marc Chaikin, founder of Chaikin Analytics, went on camera just last week to explain the biggest breakthrough of his 50-year career... If you're chasing AI stocks or parking your money in Treasury bills, Marc explains why the wrong decisions could cost you dearly right here. Further Reading "Without a credit crunch, we're safe from a sudden recession threat or a wave of bankruptcies for now," Rob Spivey writes. Companies have paid off record amounts of "junk" debt this year. But there's a catch – and it means we've softened the risk of a recession, not eliminated it... Learn more here. "We shouldn't believe the most common fears about rate cuts," Andrew McGuirk writes. The effects of the Federal Reserve cutting rates in September will only continue to strengthen the U.S. consumer. And that means now is a great time to be a market bull... Read more here. |
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