Consumers Use Credit to Plug Widening Gap Between Income and Spending

Only a few weeks into the current earnings season, and top-line momentum and commentary from firms, including banks and the payment networks, have all pointed to the resilience of the U.S. consumer.

But while they are indeed opening their wallets — both physically and digitally — there’s a gap that’s widening. Simply put, individuals and households are spending at a pace that is outstripping income.

That gap is widening, and the gap’s being plugged, in part, by the use of credit.

A Quickening of Consumption

As reported by the Bureau of Economic Analysis on Friday (Jan. 31), personal consumption expenses (PCE) grew by 0.7% in December, which is the strongest monthly increase logged through much of the past year — where the average has been about 0.4% — and well above the recent 0.6% and 0.5% gains in October and November.

The growth comes in tandem with an increase in prices — as the annual reading of price increases in December stood at 2.6%. That’s the largest increase since May.

Excluding inflation, consumption grew by 0.4%, indicating that consumers were at least buying “more” in the last month the year, in terms of quantity. But inflation, of course, is real, and is an everyday challenge.

Against the backdrop where personal income was up 0.4%, and disposable personal income was up the same amount, we can see that spending has grown faster than income. The trend’s been firmly in place, as through the past year disposable personal income was up 2.4%, which is relatively sluggish compared to the 3.1% gains in spending.

Personal income increased 0.4% month over month in December, while disposable personal income — personal income minus personal current taxes — increased at the same rate. On a yearlong perspective, and looking at “real” performance, disposable personal income grew 2.4%, below the pace of increase in spending (+3.1%). In fact, this gap has grown wider through the back half of the year: the difference in yearlong growth was just 0.3% in October (+3.2% vs 2.9%) and at parity in May.

The personal saving rate — personal saving as a percentage of disposable personal income — was 3.8% in December, the lowest rate seen in two years.

The widening gap is seen in the chart below:

As PYMNTS Intelligence has noted, coming into the end of the year, three-quarters of consumers held credit card debt. The average balance has stood at roughly $5,000, growing to $7,000 for consumers that are struggling, living paycheck to paycheck with issues paying bills. A quarter of all those surveyed said that their credit card debt was on the upswing, a figure that increases to 34% for consumers that are financially constrained.

In fact, another 54% of consumers indicated that their balances were staying the same, which hints at a bit of treading water, where anything paid down is “replenished” on the cards — again, giving credence to the likelihood that individuals are plugging that “gap” with their cards.

We have seen a rise in “pay later” options, which, as noted here, have been used by more than half of consumers. As PYMNTS Intelligence found, 76% of buy now, pay later users have said that they are satisfied with those options.

The balancing act between what ultimately comes in — that’s disposable income — and what goes out continues.