U.S. Consumption Recovery? Bank of America: July credit card spending unexpectedly rebounded, retail sales may see significant growth on Friday

Despite recent data showing that the U.S. economic growth engine is showing signs of fatigue, a key report from Bank of America paints a starkly different picture.

The latest credit card data from Bank of America indicates that consumer spending unexpectedly rebounded in July, with total household credit and debit card spending increasing by 1.8% year-on-year, reaching a new high for the year. Specifically, seasonally adjusted household spending in July rose by 0.6% month-on-month, a significant increase compared to June's 0.2% year-on-year growth.

This growth is broad-based, with contributions from both retail and the service sector, which had seen declines for three consecutive months. In detail, service sector spending increased by 0.9% month-on-month, marking the largest increase since April 2024, reversing the recent trend of weakness.

Additionally, the previously slowing non-essential consumption sector showed improvement in July. Compared to June, spending on airlines and accommodations rebounded in July, while spending on dining and bars remained stable. At the same time, airport passenger traffic, after experiencing a slump in May and June, has begun to exceed levels from the same period in 2024 since early July.

Based on this data, Bank of America predicts that the retail sales data for July (excluding automobiles) to be released on Friday will show a month-on-month increase of 0.3%, while the "control group" sales data (excluding automobiles, gasoline, building materials, and food services) that better reflects core consumer demand is expected to record a 0.6% increase, exceeding market expectations.

The report suggests that if this rebound can be sustained, it will be beneficial for the core momentum that measures consumer confidence.

However, Bank of America emphasizes that a key question is how much of this growth is driven by real consumption and how much is due to inflation effects caused by tariffs.

Seasonal Promotions and Tariff Concerns May Be Major Drivers

Although the data for July is encouraging, there may be temporary factors behind it, leading analysts to be cautious about the sustainability of consumer momentum.

Firstly, promotional activities by online retailers seem to be a major driving force.

The report notes that online promotional events, including "Prime Day," have lasted longer this year, significantly boosting online retail sales. Additionally, after a slow start in June, back-to-school-related spending began to accelerate in July.

Bank of America believes that these are essentially "event-driven" consumption patterns, and their intensity may not be sustained in the coming months.

Another factor that needs to be vigilant is tariffs.

Data shows that the dollar value of card spending in July increased more than the number of transactions, which may indicate that retailers have begun to pass on existing or anticipated tariff costs to consumers. In addition, some consumers may also "buy in advance" to avoid future price increases caused by tariffs.

Income Disparity Intensifies Consumption Differences

Although overall consumption data is positive, the disparity between different income groups is increasingly pronounced.

Bank of America's deposit data shows that the number of households receiving unemployment benefits has sharply increased year-on-year. More concerning is the disparity in wage growth: the year-on-year growth rate of after-tax wages for low-income households slowed to 1.3% in July, while high-income households' wage growth accelerated for the third consecutive month to 3.2%, with the gap reaching the highest level since February 2021.

This income disparity is directly reflected in consumption behavior.

In July, low-income households' card spending remained flat year-on-year, while spending by middle and high-income households accelerated by 1.0% and 1.8%, respectively. Since May of this year, spending growth among high-income groups has consistently outpaced that of low-income groups, particularly in non-essential consumption areas such as air travel, accommodation, and entertainment, where the gap is particularly pronounced.

Consumers' Overall Financial Situation Remains Robust

Although the pressure on low-income groups is concerning, from a macro perspective, the overall financial situation of American consumers appears to remain solid, providing support for the overall consumption outlook.

From a macroeconomic perspective, the lowest 30% of households account for less than 15% of total U.S. consumption, therefore, the robust spending of middle and high-income groups is sufficient to support a strong overall consumption outlook.

Data shows that whether measured in nominal value or inflation-adjusted value, American households' savings levels are still higher than in 2019, and the rate of decline in savings has slowed.

Credit card "borrowing capacity" data also shows positive signals. The proportion of households carrying credit card balances each month across income groups is below 2019 levels.

Although low-income households face certain pressures, the ratio of monthly credit card balances to after-tax wages is still not high, partly due to strong wage growth across income groups in recent years.

Additionally, the proportion of participants making hardship withdrawals from 401(k) retirement accounts remains at a low level of 0.7%, indicating that consumers have not generally tapped into emergency savings.

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