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US consumers are struggling to pay their bills, but that doesn’t mean they are pulling back on spending.
Bank of America last week reported that net charge-offs, which are debts that a bank does not expect to be repaid, jumped to ~$1.5 billion in the first quarter, up from $807 million the year before, and they stemmed primarily from credit card losses, according to the bank in its latest earnings call.
While Bank of America is expecting charge-offs to level off in the coming quarters, the data point is indicative of a broader trend impacting consumers: Household debt is rising, and consumers are getting worried they won’t be able to keep up with payments.
But so far these concerns have not impacted spending patterns, at least in the aggregate.
A new survey from the Federal Reserve Bank of New York found that the average perceived probability of missing a minimum debt payment increased 1.5 percentage points to 12.9%, the highest since the beginning of the Covid-19 pandemic. That same bank found that aggregate household debt increased 1.2% in Q4 to $17.5 trillion, while the delinquency rate ticked up 0.1 percentage point to 3.1% of outstanding debt.
Big spenders: Retail sales rose a higher-than-expected 4% in March from the year before, according to Census data. While a number of specialized categories such as furniture and department stores saw decreases, sizable gains in nonstore (online) and food services transactions helped buoy the indicator. In addition, the latest available data from the Bureau of Economic Analysis found that personal consumption expenditures (PCE) increased 0.8% in February.
Bank of America Institute found that total card spending per household was up 0.3% year over year in March. While that marked a slowdown from the previous month, overall the think tank is optimistic based on the strength of the labor market and wage gains.
“I think the big-picture take is that the fundamentals for the consumer remain in a really solid position,” David Tinsley, senior economist at the BoA Institute, told Retail Brew. “The underlying driver of the consumer is always the labor market and income growth, and right now that looks in good shape.”
Two other factors giving consumers a boost are falling rent inflation and higher-than-average tax refunds. On the former, the institute found that year over year growth in the median rent payment slowed to just over 4% in March, down from the roughly 9% growth of around the same time last year.
As for the latter, it found that the average amount received per refund was up 5% this year. Tinsley noted, however, that not everyone will spend that extra money on shopping. He cited a survey finding that 50% of respondents would use it to either save or pay down debts, while just short of 10% plan to spend it on shopping.
“I wouldn’t blow a huge trumpet on this one, but it’s a mild positive for the consumer, particularly at the lower end,” he said.