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Macro Indicators Impact Consumer Finance Companies



GDP growth

The revised GDP (gross domestic product) growth numbers indicate a fall of 0.20% in the annual GDP rate for 1Q15. The BEA (U.S. Bureau of Economic Analysis) released the revised numbers on June 24, 2015. The GDP rose by 2.20% in 4Q14.

Several reasons contributed to the fall in GDP including the weather, a strong dollar, the West Coast port strike, and the crash in oil prices. Most of these factors were transitory.

It’s worth noting that GDP growth has been seasonally low in the first quarter since 2010. It tends to recover in subsequent quarters. The above graph shows the quarterly US GDP growth over the last three years.

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GDP growth estimates

US GDP growth is expected to be ~2.80%, according to consensus estimates. If this happens, card companies should benefit. GDP growth is generally associated with higher business activity and employment and wage levels. This boosts consumer spending and borrowing. These are both positive for consumer finance companies.

Higher growth is also positive for charge-offs on card borrowings. Defaults tend to go down as employment and income grow. However, absolute provisions may rise as the size of the loan portfolio grows.

Employment growth

According to the latest job report, 223,000 jobs were added in the non-farm sector. The unemployment rate fell to 5.30% in June. There has been a steady addition to US jobs over the last few months. The average hourly earnings for non-farm employees remained flat. YoY (year-over-year), the average hourly earnings rose by 2%.

Positive GDP, employment, and income growth should help card companies like American Express (AXP), Visa (V), MasterCard (MA), and Discover Financial Services (DFS). Visa forms ~2.50% of the SPDR Dow Jones Industrial Average ETF Trust (DIA).


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