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Consumer credit card balances fall again

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Consumer credit card balances fell for the second straight month in July, according to new data from the Federal Reserve. Total consumer credit also declined, breaking an 11-month streak during which it steadily rose. 

The Federal Reserve's latest G.19 consumer credit report, released Monday, showed a steep 6.8 percent drop in revolving debt as consumers remained reluctant to overcharge.

"Both households and lenders are still on the cautious side," says Robert Mellman, a senior economist at J.P. Morgan Chase.

"It seems that consumers just don't want to run up these big credit card bills long-term," says Paul Edelstein, director of financial economics at IHS Global Insight. "Maybe they'll do it for a couple months," he says. However, they're not going to run up big balances that take long to pay off. "There seems to be less of that in the economy," he says.

Revolving debt, which in the report is made up almost entirely of credit card debt, fell by $4.8 billion in July to $850.7 billion.

The Fed's G.19 consumer credit report also looks at nonrevolving debt, which includes auto loans, student loans and loans for mobile homes, boats and trailers. Nonrevolving debt went up just 1 percent to $1.8 trillion in July. Overall consumer credit -- the combination of both revolving and nonrevolving debt -- fell, by $3.3 billion.  That decline brought total consumer credit to $2.7 trillion.

A rocky year for credit
July marks the fifth month this year that credit card balances have ebbed. Since January, revolving debt has increased only twice and although those month-to-month increases were significant, overall growth has been slow, say experts. "It's basically flat," says Robert Mellman, referring to this year's overall growth in revolving credit.

"We got some increases in credit card usage, but not the kind that would show a sustained confidence and improvement and willingness to take on debt," says IHS Global Insight's Paul Edelstein.  

Experts predict people will eventually resume charging more to their cards as they gradually become more comfortable with the economy. However, they are unlikely to go back anytime soon to spending the way they did before the recession.

"You're not going to see people charge up their credit cards at the first sign of good news," says Mesirow Financial's David Nice. "People are very cautious. Once you have that kind of mentality, it takes quite a bit for you to lose that."

That said, consumers are starting to signal a bit more boldness, says Chase's Robert Mellman. For example, "if you go back a year, it looked like housing was completely dead in the water. Now, people are starting to buy houses," he says.  "That shows that people are willing to make these long-term decisions."

The number of people who bought a car also shot up in August, despite rising gasoline prices, and that, too, is a good sign, he says. "Often, when gas prices go up, people delay buying a car ... That wasn't the case in August."

However, Mellman expects that consumers will remain relatively cautious for some time. "I think the change in the trend will be pretty gradual," he says. As people warily become more comfortable with spending, they will eventually begin charging more of their everyday purchases. However, right now, "most people would just as soon not take on debt."    

Consumers continue to face an uncertain fall
Consumers are dealing with a tepid economic recovery that makes it hard to justify taking on significant amounts of debt.

The economy added just 96,000 jobs in August, according to new figures released Friday by the Labor Department.

The Labor Department also revised downward the number of jobs the economy added earlier this summer. In June, the economy added just 45,000 jobs, revised down from 64,000 jobs, and in July, the economy added just 141,000 jobs, revised down from 163,000.

Experts say that the latest figures from the Labor Department underscore the economic recovery's fragility. The total number of jobs created in the past six months -- 580,000 jobs total -- is just slightly more than the 534,000 jobs that were created in the first two months of the year.

Although the total number of new jobs created this year is still a net positive for consumers, the overall pace of growth is much slower than it should be, say experts. "The numbers aren't as high as you'd like them to be for an economy that should be recovering more quickly," says David Nice, an associate economist with Mesirow Financial.

That, in turn, can have a significant impact on consumers' willingness to spend. "If you have a job and you see that more jobs are being created, you automatically feel more secure in your job," explains Nice. However, if the number of jobs that are being created continues to fall short of expectations, you may start saving more of what you earn, just in case you lose your job and struggle to get a new one.

Nice says that consumers will likely respond to the latest jobs report by tamping down how much they spend. "I would expect consumer spending to be dampened by this report," he says, particularly since the June and July numbers were also revised down. 

Consumers may also shrink their spending in the coming months to make up for higher food and gas prices, say experts. "In the near term, higher gas prices and higher food prices will squeeze real income and will squeeze purchasing power," says Chase's Robert Mellman.

That, in turn, could help slow down economic growth even more, say experts. "We rely on consumers for growth," explains IHS Global Insight's Paul Edelstein. "But the problem is, consumers are kind of saddled with debt and we're not creating enough growth to generate jobs," making it hard for consumers to spend. As a result, consumers are acting as a sort of anchor to the economy, says Edelstein, slowing down its growth.

See related: Libor, the federal funds rate and the US prime rate: A primer

Published: September 10, 2012


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Updated: 09-28-2016


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