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How Can Retail Sales Rise While Credit Card Balances Decline?

Daniel Gross, On Wednesday March 16, 2011, 6:42 am

Here's one of the great mysteries of the current economic expansion. Since March 2009, monthly retail sales have risen by 14 percent while revolving

credit outstanding has fallen 15 percent. How can retail sales be going up strongly while credit card balances are falling sharply?

A generation of retailers and analysts has been schooled to think that retail sales rise in tandem with credit card balances. Credit card companies, banks,

department stores and retailers of all stripes helped pump up sales by flooding mailboxes with offers. In 2006 alone, some 7.9 billion solicitations were

sent out, or about 26 for every person in the country. American shoppers responded to a fair number of them, and used them with gusto. Between

December 2003 and December 2007, for example, revolving credit rose from $768 billion to $941 billion, or 22 percent. In the same period, according

to the Census Bureau, monthly retail sales rose from $308 billion to $377 billion. . . or 22.4 percent. (The Federal Reserve breaks down consumer credit

into non-revolving (student loans, auto loans) and revolving credit (credit cards, essentially). Monthly data going back several decades can be seen here.

But something has changed in the past few years. The amount of revolving credit outstanding peaked at $974 billion in August 2008, and has fallen 18.4

percent since then, to $795 billion in January 2011. The nation's credit card balance has fallen in 28 of the past 29 months. The last time there was this

little revolving debt: September 2004. As the chart below shows, however, retail sales seem to have decoupled from revolving consumer credit.

In late 2008, mounting job losses and the market collapse knocked the wind out of American shoppers. Monthly sales fell off a cliff, from $373.2 billion

in August 2008 to $335.6 billion in December 2008, a decline of about 10 percent in a few months. Then, as American consumers continued to

deleverage, retail sales began to reflate. After bottoming in March 2009, at $336.2 billion, monthly sales bounced back fitfully. By the end of 2010, they

were back to pre-crisis levels. In February 2011, retail sales were up an impressive 8.9 percent from February 2010, and stood at a record $387 billion.

In the most recent three-month period, retail sales were up 8.2 percent from the year-before period.

Does more spending + less credit = a consumer revolution? It could. Aaron Task and I discuss the issue in the following clip:

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During the recession, Americans rediscovered their inner hoarders. The savings rate spiked from essentially zero at the height of the credit boom to above

7 percent. It has now (see Table 1 in this release) settled back to a less miserly 5.4 percent. With the labor market improving tepidly and the trauma of

2008 receding into the background, people may be feeling sufficiently confident to shop again but not sufficiently confident (or foolhardy) to put

purchases on a credit card that charges 18 percent interest.

But there's another dynamic at work. Revolving credit isn't down simply because Americans are becoming more aggressive about paying down debt. It's

falling in part because lenders have given up on collecting large chunks of debt from borrowers. That's the message CardHub.com has been pounding

home for several quarters. The company has tallied up the amounts that credit card companies have been charging off as bad debt. Even in the best of

times, credit card companies can't collect everything they're owed. That's part of the reason interest rates are so high. In 2006 and 2007, when

unemployment was low, card companies still wrote off $32 billion and $38 billion, respectively about four percent of outstanding balances. Write-offs

have soared in recent years: $53.5 billion in 2008, $81.6 billion in 2009 and $42 billion in the first half of 2010 alone.

So here's another way to think about it. From the end of 2008 to the middle of 2010, revolving credit balances fell by $132 billion. But in those six

quarters, companies wrote off more than $124 billion in bad debt. Borrowers only paid off a small amount of their overall credit card bill.

Even taking the huge charge-offs into consideration, the data still point to a change in the relationship between consumer credit and consumer spending.

Despite the hype, Americans are still using credit cards frequently. But when the salesperson asks "credit or debit?" credit isn't always the first answer.

More people are using credit cards more reluctantly, and more carefully. Retailers are doing a better job at convincing people to buy without the lure of

cheap credit. And that makes for a more sustainable culture of shopping.

Just as much of the appreciation of home prices in the latter stages of the boom turned out to be false, so too was a big chunk of the retail activity at the

height of the boom. Let's say Macy's lent somebody $2,000 to buy a couch in December 2007, booked the sale, and then wrote off $1,600 of the debt

as uncollectable in June 2009. Was that $2,000 sale real? By contrast, a greater percentage of the sales made in 2009 and 2010 are being paid for with

cash or debit cards. And the people who have been using credit cards in the past couple years now appear to be doing a much better job keeping up

with payments. According to Cardhub.com, the delinquency rate (a leading indicator for charge-offs), which stood at 6.5 in 2009, fell back to a non-

tragic 4.6 percent in the third quarter of 2010. Declining delinquencies are in turn bringing down charge-off rates and totals. Cardhub.com reports that

charge-offs in the third and fourth quarter of 2010 were $16.9 billion and $15.6 billion, respectively. Elevated? Absolutely. But down from their recent

highs.

So if almost all the reduction in credit card balances is coming from write-downs, has anything really changed? Are all those people professing to eschewplastic as a payment option just posers? Are Groupon's groupies simply frugal outliers?

Not necessarily. Plenty of people have been chastened by the sharp downturn, and millions of consumers have found their ability to spend (and take on

credit) seriously impaired. The U.S. economy still depends largely, perhaps too much, on all types of credit especially the housing and auto sectors.

But the numbers do show that the broad retail sector is much less dependent on credit cards than it was just a few years ago. And they indicate that the

U.S. economy in January 2011 needed much less credit card debt to sustain a higher level of retail sales than it did in the past. In January 2011, $795 in

revolving credit supported $383.4 billion in monthly retail sales. By contrast, in January 2010, more revolving credit ($854 billion) supported less monthly

retail sales ($354.7 billion). And in January 2009, even more revolving credit ($957 billion) supported even less monthly retail sales ($335.6 billion).

Call it what you want -- a sudden allergy to plastic, the New Frugality, Permanent Austerity. These changes represent an evolution, not a revolution.

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