An improving GDP growth rate, a healthy job market, and a steady hike in wages have increased the spending power of consumers. The US GDP grew 4.2% in the second quarter, which was almost double the 2.2% increase registered in the first quarter.
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. The US economy’s strong footing is marked by improvement in the GDP growth rate and a decline in jobless claims. The enactment of President Trump’s Tax Cuts and Jobs Act has led to increased cash in consumers’ hands, increasing their disposable income.
These factors are driving retail sales in the United States, 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 Visa earns fees from processing digital payment transactions, an increase in the use of credit and debit cards bodes well for the company. In the third quarter of fiscal 2018, the company recorded 11.0% YoY growth in payment volumes on a constant currency basis and a 12.0% increase in total processed transactions.
According to the Conference Board, the Consumer Confidence Index (or CCI) rose to an 18-year high in September. September’s CCI rose to 138.4 from 134.7 in August.
The increase in the CCI underscores US consumers’ general 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.
Visa’s (V) peers have also benefited from the improving economy and rising retail sales. Mastercard (MA), American Express (AXP), and Discover Financial Services (DFS) reported YoY increases of 20.0%, 20.4%, and 7.6%, respectively, in their second-quarter revenues. Visa and its peers comprise ~17.7% of the iShares US Financials ETF (IYF).