PSCU has published the July edition of the PSCU Payments Index, the goal of which is to provide information and insights to help financial institutions navigate the evolving financial landscape to make informed, strategic decisions for their organizations and members.

While recession fears are abating in the near-term, they will continue to be a concern over the next 12 months. This month’s PSCU Payments Index finds improved consumer sentiment and renewed purchasing growth for both credit and debit. In June, credit card purchases rebounded with positive year-over-year growth, while debit card purchases posted similar upward gains. This month’s Deep Dive highlights the Services sector, including which of the varied merchant groupings contributed to making this sector the most impactful on the overall growth in purchases for June.

In the Labor Department’s July 12 update, the Consumer Price Index (CPI) increased by 0.2% in June. The annual rate of inflation dropped from 4.0% through May to 3.0% through June, the lowest in the past 26 months. While this is the 12th consecutive monthly drop in the annual rate from the peak of 9.1% in June 2022, it remains higher than the Fed’s target annual inflation rate of 2.0% and is likely to tick up slightly in August. The largest contributor to inflation continues to be shelter, accounting for over 70% of the annual increase, with contributions from motor vehicle insurance, apparel, recreation and personal care. After falling in May, the energy index (which includes gasoline) increased 0.6% in June.

The Consumer Confidence Index improved substantially in June to 109.7 (1985=100), up from 102.5 in May. While this is the highest level since January 2022, consumers continue to signal expectations that a recession is on the horizon in the next six to 12 months. Treasury Secretary Janet Yellin recently commented that a recession is not completely off the table and “we should expect job gains to be coming down to more normal levels.” The Bureau of Labor Statistics (BLS) reported in its June 2023 jobs report that 209,000 jobs were added for the month (nearly 100,000 fewer than the revised May figures), with increased jobs in government, health care, social assistance and construction. The overall unemployment rate, remaining low, decreased to 3.6%, or six million people for June. With inflation still above the Fed target rate of 2%, low unemployment and job creation cooled, yet still solid, asubsequent additional rate increase may occur sooner than expected. The next Federal Open Market Committee (FOMC) meeting is set for July 25-26.

“While consumers continue to feel financial pain from two years of high inflation and sharply increased borrowing costs, signs of improved sentiment were evident in the positive year-over-year credit and debit purchase growth in June,” said Norm Patrick, vice president, Advisors Plus Consulting at PSCU. “In this month’s Deep Dive, we explore the Services sector, which contributed to the largest share of positive overall growth for credit purchases. For now, resilient consumer spending and the strong job market are staving off the odds of a full-blown recession. The coming months will be key in determining the full effects of the Fed’s aggressive rate hikes.”

A sampling of key takeaways from the July report includes:

• After a decline in May, year-over-year growth in credit purchases rebounded in June, finishing up 1.7%. Growth in debit purchases also grew, up 4.3% for June. Transaction growth for June continued to be stronger than growth in purchases, with credit up 4.1% and debit up 5.0%.

• For credit purchases, the largest contributor to growth continued to be the Services sector (1.3 percentage points of growth) while again offset by a reduction in Gasoline (1.4 percentage points). For debit purchases, the two sectors that generated the highest growth for June were Money Services, contributing 1.7 percentage points, and Restaurants, contributing 1.0 percentage point. Debit purchases were offset by a reduction of 1.8 percentage points in Gasoline.

• The Consumer Price Index (CPI-U) decreased on an annual basis from 4.0% to 3.0% in June, marking the lowest annual inflation rate since March 2021. Shelter accounted for over 70% of the all-items inflationary increase. The Fed has indicated that two additional rate increases in 2023 are likely.

• Purchase growth in the Services sector had the biggest impact in June for credit cards. While growth in most of the merchant categories in Services was marginally positive, the two common standout categories were Insurance and Medical/Healthcare. For the overall Services sector, growth in credit purchases was up 6.0% and debit purchases were up 6.6% for June with these top merchant categories contributing over half of the growth for the sector.

• Credit card non-discretionary spending also rebounded from the negative growth in May, finishing up 0.8% for June. Non-discretionary spending for debit cards was up 3.2%. Discretionary spending continues to grow at a greater rate than non-discretionary spending growth, with credit up 4.9% and debit up 12.2%.

• The credit card delinquency rate for June finished at 1.94%, above the June 2019 pre-pandemic level by 20 basis points. Total credit card balances were up 13.1% for June compared to a year ago, while the average credit card balance for active accounts was $2,971, up 8.7% (or $238) year over year.