Was Holiday Season Spending Really Strong?

Last year, Retail Sales in November and December were well above forecasts as 2023 closed with a strong holiday shopping season. Yet, this elevated level of spending did not continue in January, with sales plunging 0.8% from December.

While a natural lull in spending is expected after consumers ramp up purchases and take advantage of holiday discounts, that’s not the whole story. The large uptick in the use of credit cards and Buy Now, Pay Later (BNPL) Programs during the holidays are certainly impacting new purchases as those debts are now being repaid.

Let’s take a closer look at both credit card debt and BNPL programs, and what they reveal about how resilient consumer spending really is.

New Record for Credit Card Debt

Credit card debt hit a new record high in the fourth quarter of last year, with balances reaching $1.13 trillion, according to the New York Fed’s Quarterly Report on Household Debt and Credit. Debt increased $50 billion in the fourth quarter alone, which was a 4.6% jump from the third quarter.

Missed credit card payments also moved higher, as data showed that credit card delinquencies have risen more than 50% in the past year. The Fed’s report showed that 6.4% of accounts were 90 days past due at the end of last year, up from 4% at the end of 2022. Elevated interest rates and higher borrowing costs have hindered some consumers’ ability to make these payments in full.

BNPL Also Hits Cyber Monday High

The high interest that can accrue on unpaid credit card balances is one reason why many consumers have turned to BNPL programs. In fact, purchases using BNPL hit an all-time high on Cyber Monday last November, up 43% from a year earlier per Adobe Analytics. The number of items per order was also up 11% annually.

The Consumer Financial Protection Bureau explains that BNPL loans allow people to purchase something immediately and pay off the balance in equal installments. Typically, people encounter BNPL options when shopping online or through a mobile app, though they can also be available in stores. A common repayment plan involves splitting the payment into four interest-free biweekly payments, though there are usually late fees for missed payments.

Yet, research has shown that shoppers are using BNPL for more than just big-ticket items, as a growing number of consumers are turning to this option for groceries and other everyday necessities.

What’s more, the New York Fed has found that many BNPL users are facing financial difficulties, further compounding the risks for increasing debt load. Fed economists noted that data from their June 2023 Credit Access Survey showed that, “Despite being fairly broad-based, with significant take-up among higher educated and higher income respondents, overall we find that those with lower credit scores and greater unmet credit needs make up a disproportionate share of all BNPL users.”

So, what’s the bottom line?

While Retail Sales during last year’s holiday shopping season appeared strong, the use of credit cards and BNPL has had a draining effect on spending at the start of this year as those debts are now being repaid. It will be important to see if spending remains slow heading into the spring, especially since the Fed will be monitoring the strength of our economy as they weigh their Monetary Policy decisions this year.

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By Shelly Williams @ MBS Highway