Visa Inc. (NYSE/V), the credit card company, recently published its Retail Spending Monitor report, which keeps track of consumer spending in the U.S. The report shows that, excluding autos and gas, retail sales went up by 4.5% in April 2015.
Big Increase in Consumer Discretionary Spending
Things look quite good as far as Visa is concerned. Wayne Best, the company’s chief economist, stated, “Across the country, we’re seeing consumers continue to spend as their confidence in the economy grows.”
He also thinks that this will be beneficial to the U.S. economy: “With spending increases over the prior year from retailers and restaurants as well as a more robust travel sector, this broad-based growth is making an important contribution to the economic recovery.” (Source: Businesswire, May 7, 2015.)
Since gas prices began to fall last summer, people should have more money on hand. But they haven’t been spending all that much—perhaps because they thought the low gas price was only temporary. Now Best thinks people are taking out the savings from the gas price windfall and starting to spend it.
There is a notable increase in consumer spending on discretionary goods and services. These are goods that are not essential to our everyday lives. For example, spending at hotels jumped up 9.4% in April compared to last year. Restaurant spending is up by 9.5%. Spending on electronics, appliances, and furniture increased 5.1%.
Increased Consumer Spending, or Maxing Out Credit Cards?
More spending seems good for the U.S. economy, as consumer spending makes up two-thirds of the country’s gross domestic product (GDP). But is this report by Visa missing something?
Yes; and here’s why.
Visa is a credit card company. The reported increase in consumer spending could simply reflect the fact that people have been maxing out on their credit cards. And that is not something our economy needs.
On average, the U.S. household has a consumer debt profile of $15,609 in credit card debt, $156,706 in mortgage debt, and $32,956 in student loan debt. That is a huge burden for the average U.S. family. If more consumer spending means adding more to their credit card statements, the average U.S. household will be under even more pressure to repay those debts. (Source: Nerd Wallet, last accessed May 7, 2015.)
When one’s debt burden reaches a point that cannot be paid back, the person will default. And the debt will be worthless. Sound familiar? It should, as that is exactly what happened when the mortgage-backed securities collapsed in 2008. And since credit card receivables have been packaged to create another type of asset-backed security, defaulting on credit card debt could have a contagion effect on the U.S. economy.
If you want to avoid unnecessary debt, simply refrain from buying something you can’t afford. It seems like a simple concept, but it’s easier said than done.
Remember that consumer discretionary companies may see their sales increase due to Americans buying on credit. As a result, their stock prices may rise. But this won’t be the case for a very long time; because the upside potential is too little, and the downside risks are increasing.