MAG 2023: Merchants Worry About Consumer Spending, While Labor Markets Hold Up

Merchants are more worried about consumer spending than is warranted by the figures or the economy. That was the key message conveyed by Mastercard at the Merchant Advisory Group (MAG) 2023 conference in Atlanta on Monday.

“The household balance sheet is perfectly healthy,” said Michelle Meyer, Mastercard’s chief economist for North America, during a Monday morning session at MAG. She explained that while in 2022, consumer spending was powered more by debt and savings spending, in 2023 to date it was labor income that supported growth in consumer spending.

At the same time, 60% of the 100 merchants polled in the audience at the session said they were concerned by weakened consumer spending. This was the greatest concern in the room by far, followed distantly by access to credit and interest rates, which came in at 13%.

Return to pre-Covid normal

In general, the economy is normalizing to pre-pandemic levels on a host of economic indicators after a wild ride during the Covid-19 pandemic - when a recession and mass unemployment were headed off by a large shot of stimulus money that generated economic growth.

“The labor market is adjusting, but it is still a positive story, even though it is not accelerating at the same growth as last year,” said Meyer.

Unsurprisingly, the major credit card networks Visa, Mastercard and American Express all outperformed their earnings estimates in the second fiscal quarter, due to increased credit card spending and the growth in the international travel segment. Meyer in her presentation also emphasized that consumer spending has been strongest in lodging, restaurants, travel, & experience economy, while spending for goods has been relatively weak, negatively impacted by inflation and higher interest rates.

Credit card balances reached a record $1.03 trillion in the second quarter, as Americans have returned to accumulating debt post-Covid 19. Americans carried a balance on 56% of all active credit card accounts in the third quarter of 2022, according to the most recent available data from the American Bankers Association.

The rate of new credit card delinquencies has surpassed its pre-COVID level, reaching 7.2% in the second quarter, based on an August report from the New York Fed. The Fed’s measure of credit card debt 30 or more days late climbed to 7.2%, up from 6.5% in Q1 and achieving the highest rate since the first quarter of 2012 though close to the long-run normal, Fed officials said.

Pressure from Declining Real Household Income

On the inflation issue, household income adjusted for inflation and taxes is running some 9.1% below where it was in April 2020, putting additional pressure on consumers, according to SMB Nikko Securities.

“This is an issue because the sustainability of consumers’ pandemic debt-binge was partially predicated upon their incomes steadily rising,” Troy Ludtka, senior U.S. economist at SMBC Nikko, said in a client note. “Instead, the opposite occurred, and now the rate at which borrowers are running late on their debt payments is back to pre-Covid levels.”

This means Americans are increasingly relying on credit cards to finance their lifestyles even as inflation levels off. Consequently, merchants can expect an increase in the risk of first party fraud as people seek to recoup funds they have spent but cannot afford to pay.

Economic ‘Soft Landing’ Increasingly Likely

Nevertheless, the U.S. economy is actually doing better than predicted earlier in 2023, when Visa Principal U.S. Economist Michael Brown predicted 1% GDP growth this year. So far, GDP growth in Q1 was 2% and the latest Q2 GDP growth estimate from the Bureau of Economic Analysis was 2.4%.

While there is still talk of a recession in the U.S., it has become much more likely that there will be a “soft landing.” The economy has been helped by a relatively strong labor market that registered an unemployment rate of 3.8% in August - just 0.1 percentage point higher than the same time last year - and which has enabled continued growth in consumer spending to shore up weaker investment.

Meanwhile, the 12-month inflation rate has halved from 6.4 percent in January to 3.2 percent in July. The reduction in inflation should remove pressure on the Fed to raise interest rates further, making a recession less and less likely.

Takeaways for the Networks and Merchants

The result of all these macroeconomic trends has been first and foremost continued growth in credit card network profits, as they have benefited from increased transaction volume and credit card spending. However, for U.S. facing merchants as well, they should see stable to increasing topline growth as the economy not holds its ground but even grows this year.

Merchants’ main worry should be eroding profit margins as inflation still remains an issue and first-party fraud (especially but not only friendly fraud) continues to grow as consumers find themselves in a growing pile of debt.