Credit card debt is down more than 18% from its 2008 high. The U.S. unemployment rate is stuck near double-digits, as the economy remains fragile. So how is it that American Express has reported record customer spending in the fourth quarter and for the full year? Although some consumers are struggling and curbing their credit card debt, there are a couple potential explanations for Amex's record spending during the quarter and year.

Explaining Record Customer Spending

In the Amex earnings press release, Kenneth I. Chenault, chairman and chief executive officer says:

"With cardmember spending up 15 percent this period, we reached all-time records for the quarter and the full year."

Retail Sales Soaring Everywhere

At first glance, this might seem surprising. But perhaps it shouldn't be. We already know that U.S. retail sales hit a new all-time high in December. Annual retail sales, however, did not. So this can't tell the whole story.

More Card Usage?

Another likely explanation is that Americans are using credit cards for more convenience purchases than they used to. Then, even in the face of declining credit card balances, credit card usage could actually be up. For example, if spending happened to be constant over two periods, card spending would rise if card usage increased. It's also worth noting that the lion's share of Amex's business comes from customers who don't run a balance -- so they aren't necessarily curbing their spending.

Wealthier Consumers Spending More

But a part of Amex's success also probably has to do with its customer base. It caters to ultra-prime relatively high-income individuals. Since the economic recovery began, wealthier Americans' spending rebounded quicker than that of consumers in other income segments. According to Gallup, upper-income consumers have been significantly more confident about the economy than middle- and lower-income consumers. That implies that wealthier Americans' spending has probably increased by more.

gallup confidence 2011-01-25.gif

Looking Beyond Customer Spending

Besides better spending, Amex also benefited from lower loss provisions. They fell to $111 million, down 68% from $346 million a year earlier. If you're seeing better revenue and lower costs, it's easy to understand how you're making more money.

But it doesn't look like these higher profits will necessarily translate into more jobs at Amex. The company also announced a $74 million charge related to job cuts in its servicing network. Fewer delinquencies and charge-offs also mean easier servicing, which implies that fewer workers are necessary. It's also possible that Amex could be outsourcing more servicing to overseas workers, though the earnings report did not indicate this as part of the reason for the job cuts.

Although Amex's profits might look pretty good now, significant regulatory challenges lie ahead. New interchange rules could affect its revenue. The Department of Justice is also examining its alleged anti-competitive behavior. As its industry continues to change, Amex will have to evolve along with it.

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