First Data

Last week was another week of economic good news tempered by bad, offering a great opportunity to consider the current (and likely future) impact on payments.

First, the good news: card delinquencies continue to decline, as the top six banks reported that rates of defaults and late payments fell in March . Overall, delinquency and charge-offs, as they're called in the industry, are at their lowest points since mid-2008. And in a further indication of positive trends, monthly default rates in March declined in all but one of the five cities surveyed in the S&P/Experian Credit Default Indices (Los Angeles was the lone exception; default rates went down in NY, Chicago, Miami and Dallas).

On top of this, recent SpendTrend statistics suggest that the fundamentals of payments and the economy remain in recovery, albeit with recent headline-grabbing events an additional degree of weakness. In March, dollar volume growth remained steady and average ticket growth was steady, according to the data tracked for our SpendTrend product. This was particularly notable given the tough year-over-year comps. March 2010 saw the strongest rate of growth of any month in 2010, making the positive comparisons with March 2011 worth noting.

Yet those numbers do suggest that, while the economy remains on track, things will get a little tougher moving forward. The stability in dollar volume growth was due in large part to the impact of skyrocketing gasoline prices, while the stability of average ticket growth was influenced both by price inflation and the elimination of discounts introduced by retailers around the holidays. In addition, the broader economic headlines have been anything but sanguine recently. Oil and gas prices have gone up with a vengeance. The budget battle is over, but the battle over raising the debt ceiling has just begun.

In positive news, March housing starts showed signs of life. After a long and dismal stretch scraping the bottom, home construction rose 7.2% in March, while building permits—an indicator of future housing growth—were up 11.2% after touching a fifty year low in February. Likewise, the housing market is still weak, but showing tentative signs of a recovery. But Standard & Poor’s decision the same week to leave future US debt ratings open to future downward revision introduced a new and ominous tone to the long-term future of the US economic recovery. In addition, the Philadelphia Fed reported on April 21 that manufacturing activity in the mid-Atlantic region declined sharply in April from their March readings. The Philly Fed’s diffusion index decreased from 43.4 in March to 18.5 in April—much lower than the expected drop to the mid-30s.

On top of all this chatter, Atlanta Fed Chairman Dennis Lockhart weighed in with comments that give insight into impact of rising oil prices on the durability of the recovery.

Lockhart was quoted in a Bloomberg story as saying that the steady surge in oil prices introduced a “double whammy” into the recovery—adding both to inflationary pressures at the same time that, given America’s dependence on oil, it slows down the economy a bit. If oil continues its sustained rise and reaches $150 a barrel, Lockhart said it could be enough to push the economy back into recessionary territory.

How are current trends impacting payments?

Well, as I wrote recently , credit has seen resurgence in growth since January 2011, but it doesn’t yet appear that this increasing use of credit yet includes a return to increasing levels of revolving debt. In other words, more consumers are using credit, but are choosing to transact (pay off bills at month’s end) rather than revolve that debt on an ongoing basis. In addition, debit usage spiked upward in March, likely in large part the result of tax refund season, with those refunds being auto-deposited into consumers’ DDA accounts. ( Subscribers can read more in the latest addition of SpendTrend . )

On top of that, the decline of default and late payment rates suggests that payment fundamentals continue to improve in the US economy. But the impact of macro trends will also likely an impact—the economy’s relative strength will influence how far from “core cash” the average consumer chooses to go.

I’ll be talking more about these trends and their impact on payments on May 4th in Las Vegas, during First Data’s annual Leadership Summit . I hope to see you there. Given the headlines, there will continue to be a lot to say.

It’s at times like these where I’m reminded of the old saying “Hope for the best, but prepare for the worst.” No one’s yet calling for a return to the worst days of the recession, but continuing to hope for things to keep getting better—and preparing for the possibility that they won’t—seems like sage advice, given current trends.