A healthy job market and a steady hike in wages have increased the spending power of consumers. According to the U.S. Bureau of Labor Statistics, the unemployment rate declined 20 basis points in September to 3.7%, the lowest level since December 1969. An improving GDP growth rate is creating a favorable business environment for Mastercard. In the second quarter, the US GDP grew 4.2%, 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 an 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.
These factors are driving retail sales in the US, boosting digital payment transactions. In September, US retail sales increased 0.1% sequentially, marking the eighth straight quarter of growth. On a YoY basis, retail sales grew 4.7%.
As Mastercard (MA) earns fees from processing digital payment transactions, an increase in the use of credit and debit cards bodes well for the company. In the second quarter of 2018, the company recorded 15.3% YoY growth in gross dollar volume and an 18.4% increase in total processed transactions (purchase plus cash).
Consumer confidence index
According to the Conference Board, the CCI (Consumer Confidence Index) rose to an 18-year high in September. September’s CCI came at 138.4 from 134.7 in August.
The increase in the confidence index underscores consumers’ belief that the pace of growth could continue. This optimism led to an increase in spending, which is a good sign for financial transaction services companies.
The company’s close peers are also benefiting from the improving economy and rising retail sales. Visa’s (V) third-quarter fiscal 2018 revenues rose 14.8% YoY. American Express (AXP) and Discover Financial Services (DFS) reported YoY increases of 20.4% and 7.6%, respectively, in their second-quarter revenues. Visa and its peers make up ~17.7% of the iShares U.S. Financials ETF (IYF).