Consumers keep spending, but credit card delinquencies stay stable in June (NYSE:COF)

Consumer spending has proved resilient, rising more than personal income as inflation remains elevated. That has surprised many economists, but also has them watching credit card delinquencies and lenders’ net charge-offs to see if consumers can keep up with payments.

Last week, the Philadelphia Fed said that past-due credit card balances in Q1 2024 reached their highest level since 2012, when the district Federal Reserve bank started tracking the data.

In Friday’s personal income and outlays report for June, personal consumption expenditures (i.e., consumer spending) rose 0.3% from May, while personal income only increased 0.2%. Meanwhile, core PCE, a measure of inflation, increased 0.2% M/M and 2.6% Y/Y, keeping pressure on consumers.

“Consumers still keep spending, and I think a lot of that now is moving into credit cards,” said Dan North, senior economist at Allianz Trade.

With the reliance on credit and the pressure of inflation, credit card delinquencies and net charge-offs offer a window into how healthy consumers’ finances are. In June, credit card delinquencies, on average, stayed roughly stable at 2.79%, according to data disclosed by seven credit card issuers. That level, though, is higher than 2.48% in June 2023 and 2.60% in June 2019, before the pandemic hit, which spurred a raft of relief measures to keep consumers afloat.

Net charge-offs, or the amount of receivables that banks write off as uncollectible, declined to 4.19% in June from 4.31% in May. That compares with 3.41% a year ago and 3.68% in June 2019.

However, banks report that the growth in delinquencies and charge-offs is slowing. During Capital One’s (NYSE:COF) Q2 earnings call, Chairman and CFO Richard Fairbank said, “The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the second quarter.”

Synchrony Financial (NYSE:SYF) President and CEO Brian Doubles told shareholders that the company has taken actions when it sees signs of a higher probability of default on loans, a move that will limit loan growth. “These credit actions, along with a more selectively spending consumer, have contributed to lower new account and purchase volume growth in the second quarter, but have also improved our recent delinquency trends and should strengthen our portfolio’s credit trajectory in 2024 and beyond,” he said during the company’s Q2 earnings call.

Jefferies analyst John Hecht expects net charge-offs to continue improving. The “majority of issuers are exhibiting better results vs seasonal trends in delinquencies, which should flow through net charge-offs within 5-6 months,” he wrote in a recent note to clients. He covers American Express (NYSE:AXP), Bread Financial Holdings (NYSE:BFH), Capital One Financial (COF), Discover Financial (DFS), and Synchrony Financial (SYF).