US consumers relying on credit

Consumers in the US are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices.

The dollar volume of purchases charged grew 10.7 per cent in June from a year ago, while the number of transactions rose 6.8 per cent, according to First Data Corp.’s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor.

“Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices.”

 

It’s a cash-flow problem.”

Rising costs of food and gasoline are leaving Americans less money to spend on discretionary items.

, slowing the pace of the recovery, Tavares said. Household spending accounts for about 70 per cent of the world’s largest economy.

After-tax income adjusted for inflation fell 0.1 per cent from January through May, according to figures from the Commerce Department. The drop came as Labor Department data showed energy prices rose 8.2 per cent and food climbed 2 per cent during the same period.

‘DRAMATIC’ SWINGS
The swings in purchases of fuel and food have been “dramatic,” Tavares said. The volume of gasoline purchases placed on credit cards jumped 39 per cent last month from a year earlier, compared with a 21 per cent increase in June 2010, he said. Food shopping increased 5 per cent after falling 7 per cent last year.

The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Tavares said.

The figures are in synch with data from the Federal Reserve. Revolving credit, primarily credit card balances, increased by $3.37 billion to $793.1 billion in May from an almost seven-year low of $789.8 billion in April, figures from the central bank showed. The gain was equivalent to a 5.1 per cent increase at an annual rate.

The use of credit cards is a “smoking gun” that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to “get by,” said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto.

“People on the margin are putting necessities on their credit cards and this is a trend that’s very consistent with what lower-end retailers have been saying about their paycheck cycles,” Rosenberg said.