American Express Drops a Bomb on Consumer Spending

After the close Thursday, credit card company and Dow constituent American Express (AXP) put out a startling press release. In it they said that American Express card member spending began to slow and delinquencies and write offs trended up in December.

Worldwide card member spending increased 13%, excluding currency effects, in the 4th quarter but trailed off to only 10% in December “with particular weakness in US billings”. The CEO even went so far as to single out weakness in California, Florida and other parts of the country affected by the housing bust.

Delinquencies on US card balances also increased from 2.9% to 3.2% and write offs increased from 3.7% to 4.3% in the 4th quarter (click to enlarge):

This is another compelling piece of evidence that consumer spending is slowing and that US consumers are feeling the pinch from the housing bust. I’d guess that this is going to have a pretty sizable negative effect on stocks when they open for trading Friday.

Disclosure: Top Gun has no position in American Express (AXP)

Comments

[Celticpole]

My educationally informed gut feeling is that Amex has finally SHOWN lowered revenues for 12/07 because their charges to POS merchants are considered too high by the latter. Personal experience has shown that more and more stores are refusing to accept my AMEX cards (3) and opting for MC/VS only. Check it out for yourselves! Personally I never argue with actual reality. Discover Card had the same "problem" a few years ago - particularily with gas stations. That said, I don't think that one can extrapolate AMEX woes to MC/VS, unless the medium doing so has a "it bleeds, ir leads" mentality. As for their delinquencies being up in 12/07, I'm sure that that was expected given the fiscal triage history of the average consumer facing foreclosure, enemployment or reduced income flow. I'm kind of glad to see that AMEX (green & gold) may be dragged into the real commerce world. The place where 90% of us really shop. No. it's not Macy's or Nieman Marcus. Good Golly, they may finally even learn the meaning of one of the most important terms in CC applications: No annual fee.

[Kunst]

I agree with the comment about Amex's excessive discount fees. We phased them out over the last year and now accept only Visa and Mastercard. I also dumped Amex personally because I am unwilling to pay an annual fee. American Express has no differentiation for me over Visa/MC.

But the delinquencies problem says something else. Amex bills are supposed to be paid off monthly, not carried from month to month. Traditionally Amex customers have been more affluent, although with Costco and Sam's Club pushing them I wonder if they have democratized. Anyway, if this group is having troubles, what does that say more generally, and about Visa and Mastercard in particular?

[gokou3]

There are zero-annual-fee AMEX cards too. With cash rebates.

[Marty]

Again I think people miss the forest for the trees. Inflation is not 2.6%. People are struggling with double digit price increases in almost everthing they buy at a time when incomes are strained and benefits are being cut. Sub-prime has been a scapegoat. Just watch what unfolds over the next 6 months. I cannot believe there are not people to stand up and understand 3rd grade math .

In the last 8 years the Govt stated CPI increased about 25%. This is what Social security recipients received.

In my world , here are some increases in that 8 year period..

Gas 150%
Real Estate taxes 86%
Electriciy 74%
Milk 100%
Beef 60%
Health insurance 200%

The bottom line is its unannounced inflation that is the root cause of all the payment problems. If all these other things didnt go up people could afford their "subprime resets" . They were just the first domino to fall.

Honestly I have lost faith in almost all financial commentators as they seem to be in their own world. How anyone can stand up there and mouth such B.S. statistics as 2.6% inflation and surging job markets is beyond me.

Any idiot with a calculator can figure out price increases and everyone knows high paying quality jobs are leaving and being replaced by low paying jobs with fewer benefits. All you need to do is add up all the chain hires for the top 100 retail and franchise chains over the last 10 years and compare that to the "jobs added" figures. In the meantime we lose engineers, auto-workers, technicians, software engineers etc etc.

What the heck is wrong with people! I am a CPA in Wallingford, CT and these problems have been telegraphed for the last few years at least.

Id love to share ideas with anyone here, and talk to someone at CNBC to set them straight but you cant reach these people in wonderland...

Marty
[e-mail]

[JamesSM]

Excellent post Marty. Inflation is definitely the main culprit of the pain many Americans are feeling. The CPI does not give a true picture of the inflation that Americans are experiencing. I'm down in Sunrise Florida, a suburb of Fort Lauderdale and one of the epic centers of the sub-prime mess, and can tell you that people are definitely pulling back on spending. Our malls are still full but many of the people spending are tourist and snow birds flushed with cash from their strong currencies. The shopping centers frequented by the locals are losing tenants and are down on traffic. As for the job market, if you aspire for a very low paying retail or customer service rep job, then it is great but good high paying jobs are very hard to find and extremely competitive. Experienced, college educated workers are a dime a dozen down here.

[Kunst]

Inflation is the mechanism for reducing the American standard of living to world standards, and to the level that can be supported by the value we create.

For a long time, Americans have been paid far more than people in other countries for the same work, and have consumed a disproportionate amount of the world's resources (e.g., energy). This cannot continue. The barriers (transportation, tariffs, information) that made it possible have fallen.

It isn't practical to cut wages in half. Instead, inflation will increase costs relative to income until the same result is achieved. Underreporting inflation keeps incomes from rising proportionally, not that they could.

Another mechanism is replacement of skilled American workers with equally (plus or minus) skilled foreign workers who will do the job for less, whether here or in their own countries. It's called competition, something the high-cost provider never likes.

The problem is compounded by America's substandard educational level. Gone are the days when a high school diploma could give you a middle-class career job. Other countries are far more committed to advanced education (e.g., math, science, languages) because they know this is the path to success. We have been sitting on our butts thinking that kind of effort wasn't necessary. Wrong.

America is still living in Fantasy Land. Awakening to reality can be brutal, but it's the first step in getting our act together.

[Marty]

Great post Kunst. I think you hit the nail on the head. Now that makes complete sense to me. I wish people that understand these things would be discussing them in the media so people can be educated as to what is really going on. From my point of view , the great reset to the world standard of living has begun. The few things that dont make sense to me are 1- With monetary inflation shouldnt real estate as a hard asset also eventually increase (like gold and metals?) 2- It seems like the only smart move would be to downsize lifestyle immediately and cash in on any inflationary gains you might have left in property etc. This would put people in a debt free safer position given the changes coming.

Honestly I think the majority of people just dont "Get it" yet. Our personal plan B is to see how things go by mid year and downsize pay off every bill, debt we have and sit with income higher than our housing needs with room for downside stability if things get worse.

Marty

[Kunst]

I watched the New Hampshire presidential debates. Not one of the candidates (with the oddball exception of Ron Paul) even acknowledged the real problems we have, let alone proposed meaningful solutions.

Regarding real estate, I have an unusual theory. Real estate values are deflating at the moment, because they got way ahead of the trend line. That is a big problem for our financial system, which is based on debt, leverage, and the expectation that RE values always go up. Stick with me to the end to see how I think this will be "fixed".

I don't think Bernanke and company are going to let overall deflation take hold, and that is a serious danger with the money balloon deflating the way it is. Maybe I'm too cynical, but I just don't see the US ever paying back all the debt we have accumulated -- federal debt, entitlements; state/local government and corporate retiree commitments; and of course, consumer debt.

At some point, I think the Fed/US government (yes, they are the same really, at least they work toward the same ends) will essentially pay off those debts by super-inflating the US dollar. Conceptually, all they have to do is write a $9 trillion check and the national debt is gone. That's the advantage of having your debts in your own currency (once anyway).

Yes it's a rotten trick, but does anyone really think we are ever going to spend less than we take in (government or consumer) so we can use part of our current income to pay off accumulated debt? A lot of accumulated debt that would take a long time to pay off? Isn't that the exact opposite of what we've been doing for decades? We pay $400 billion a year just in INTEREST on the national debt. If we made taxes exceed spending (by raising and/or cutting) by $300B a year on top of the interest, it would take us 30+ years just to pay off the official national debt. And that's on top of the impending sharp increases in Social Security and Medicare outlays. I'm sorry, I just don't see that happening.

What's the other alternative? Debt continues to increase, interest payments continue to increase, until something breaks. For individuals, its usually bankruptcy. Theoretically, the US government can borrow for ever, but does that make sense? Remember the rule: if something cannot continue, it will stop. It's only a question of when and how. Last week, Moody's warned that the credit rating of the US government could be negatively affected within the next decade (!) if a realistic solution to the entitlements wave isn't found.

I think the party will stop something like this: 1) the dollar continually weakens, meaning that those who sell stuff to us demand more of our less valuable dollars for that stuff. 2) interest rates on federal debt go up, pushing that $400B to higher levels. 3) This feeds on itself until the dollar really drops in value. 4) At some point this turns into an undeniable CRISIS. Then, the Fed/US government balloon the money supply, more or less wiping out our debts.

Back to the housing equity problem. People over-stretched to buy houses on the expectation that values would continue to go up. Implicitly they also expected incomes to go up, because a lot of buyers were over their heads from a cash flow point of view once those ARMs reset. Neither expectation has been fulfilled, and massive foreclosures are the result. Two million houses are unoccupied in the US today. This could easily feed on itself and cause a major deflationary spiral in housing prices. Even "normal" homeowners will find that they no longer have any equity in their homes, even if they can make the payments OK.

What would "fix" this? How about if housing prices doubled? Would that solve the problem? Yeah, pretty much. Those folks who are underwater have equity again. If they can't make the payments, they can sell without going bankrupt. The wealth effect is back. People can use that equity to spend, spend, spend. Sort of.

How do housing prices double? In about 20 years, under current conditions. But if you super-inflate the US dollar, it can be accomplished very quickly. Lenders get screwed, but they're not doing too well as things stand now. Foreign lenders in particular wind up holding the bag. Borrowers largely escape, paying back debt in cheaper, more plentiful dollars. Incomes go up (this is a key necessity) but not as much as prices (this is a key reality, and a painful one).

The situation is pretty ugly. A one-time super-inflation can wipe out most of our debt, at the cost of drastically reducing the value of the US dollar. After that, no more external debts in dollars, you can count on that.

If you don't like this "solution" (and I don't), tell me how all that debt is going to get repaid honestly.