Investors have had a lot to weigh this year, with inflation at its highest rate in over 40 years. To bring down inflation, the Federal Reserve is increasing interest rates at the fastest pace in decades. This has caused market volatility and has stocks off to their worst six-month start in over 50 years, and many experts are concerned that a recession is imminent.
However, one industry giving the economy the green light is the credit card industry. American Express (AXP -0.84%) and Discover Financial Services (DFS -2.60%) recently shared their perspectives on the consumer and where the economy is now -- which could be in a stronger position than you think. Here's why.
Image source: Getty Images.
Credit card payment volume was up from last year
American Express and Discover Financial Services operate payment networks that help make it easy for consumers to spend using credit cards and other payment types. Credit card companies provide a view of the health of consumer spending, which is at the heart of a healthy economy.
American Express reported solid growth in the second quarter, with net revenue up over 31%. The company has seen its network volume, the total dollar amount of billed and processed payments, increase 28% year over year.
It has benefited from recovery tailwinds in the U.S. and globally, and travel and entertainment expenses have bounced back, exceeding pre-pandemic levels in April. CEO Steve Squeri said the rebound in travel "has been faster and stronger than anyone expected."
Discover saw its loans increase 13% from last year, but revenue fell 10%. This decrease was primarily due to a difference in the performance of its investments. Last year it had a $729 million gain on its books, and this year it had a $42 million loss. A positive sign was its net interest income, up 14% due to higher interest rates and increasing credit card usage from last year.
Both companies expressed little concern about credit performance
American Express and Discover both noted that consumer behavior and loan portfolio performance was robust in the second quarter and that these don't suggest a slowdown in the economy right away.
American Express saw card member loan write-offs of 0.8% in the quarter, down from 1% in the same quarter last year. It also had a $410 million provision for credit losses, which it built up due to larger loan balances and a slightly worse economic outlook when compared to the first quarter. Loan loss reserves are 3.1% of its total loan balances -- which remain below pre-pandemic reserve levels.
Discover saw charge-offs of 1.8%, down from last year's 2.12% charge-off rate, while delinquencies rose modestly, from 1.35% last year to 1.63% this year. CEO Roger Hochschild said that "behavior and trends from our consumer loan portfolio currently do not suggest that a downturn is imminent." He said that labor markets remain tight and employment conditions support consumer spending and good credit performance.
Image source: Discover Financial Services. NCO is the net charge-off rate, and DQ is the delinquency rate.
Investor takeaway
American Express and Discover are in an excellent position to evaluate the consumer from a spending perspective. From their angle, consumers remain healthy and continue to spend and pay down their balances, and high inflation has modestly helped businesses through higher transaction volumes.
Both companies noted that rising unemployment rates could ultimately hurt their businesses. While some companies have talked about slowing hiring, American Express' management doesn't see it as being broad-based or at a large scale right now. Not only that, but both companies are in a good position because they serve high-end customers who could better weather inflation and a potential economic downturn. Overall, credit performance is strong, and they believe that travel and entertainment expenses will remain in high demand for the foreseeable future.
While there is concern about a potential recession on the horizon, American Express and Discover are signaling that the consumer is healthy, and the businesses should continue to do well amid inflation -- unless the employment market changes drastically for the worse.
