A healthy job market and steady growth in wages have led to an increase in consumers’ disposable income and spending power. According to the U.S. Bureau of Labor Statistics, the unemployment rate in August was 3.9%. The current unemployment rate is hovering around 3.7%, its lowest level since the 1960s.
An improving GDP growth rate is creating a favorable business environment for Mastercard. In the second quarter, the US GDP grew 4.1%, almost double the 2.2% increase registered in the first quarter. This growth rate was the highest since the third quarter of 2014.
Lower jobless claims and improving GDP growth rate indicates that the US economy is on strong footing. Additionally, the enactment of the Tax Cuts and Jobs Act of 2017 has increased consumers’ disposable income.
The factors are driving retail sales in the United States, boosting the number of digital payment transactions in the economy. According to data compiled by the United States Census Bureau, US retail sales improved 0.5% in July, marking the sixth straight month of growth.
As Mastercard (MA) earns fees from processing digital payment transactions, an increase in usage of credit and debit cards bodes well for the company. In the second quarter, the company recorded 17.0% YoY growth in switched transactions and a 14.0% increase in gross dollar volume.
Rising consumer confidence index
According to data provided by the Conference Board, the Consumer Confidence Index increased to 133.4 in August from 127.9 in July—its highest reading since its October 2000 reading of 135.8.
This improvement in the confidence index underscores consumers’ outlook that the pace of growth could continue in the near future. This optimism boosts consumer spending, which is a good sign for financial transaction services companies.
Rising retail sales and an improving economy have benefited the payment processing sector. Visa Inc. (V) reported an ~15.0% surge in its fiscal third-quarter revenues. The company’s two other close peers, American Express (AXP) and Discover Financial Services (DFS), had reported YoY increases of 20.4% and 7.6%, respectively, in their second-quarter revenues. Mastercard and its peers make up ~10.3% of the iShares US Financials ETF (IYF).