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Consumer credit card debt dipped in April

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Consumer credit card balances resumed their downward fall in April after rising sharply the previous month, according to new data from the Federal Reserve.

The Federal Reserve's latest G.19 consumer credit report showed a 4.8 percent drop in revolving debt as more consumers kept a tight rein on their credit card balances. Revolving debt, which is made up almost entirely of credit card debt, declined by $3.4 billion in April to $862.3 billion.

April's drop in credit card debt occurred amid a string of disappointing news headlines about slowing job growth, leading experts to speculate consumers were spooked by the bad news.

Consumers are likely to resume borrowing in the months ahead, economists predict. But if the economy continues to lag, they may spend less than they otherwise would. "I'm not ready to say consumers will reverse and become extremely frugal," says Michael Walden, a professor of economics at North Carolina State. However, people "who perhaps were contemplating a big ticket purchase, some of them will begin to question that and say, 'Well, maybe we'll begin to put that off for a few more months.'"    

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 7.1 percent to $1.7 trillion in April. That rise was enough to overcome the decline in credit card debt, so overall consumer credit -- the combination of both revolving and nonrevolving debt -- jumped 3.1 percent in April, hitting $2.6 trillion. This is the eighth consecutive month that total consumer debt has risen.

Consumer debt will rise ... eventually
U.S. consumers are facing the third year in a row that economic growth started strongly before faltering in the spring. That has made some consumers nervous and could be playing a role in how much new debt they're willing to take on, say experts.

Numerous economic indicators, including a slightly higher unemployment rate and weaker demand for U.S.-made products, have also prompted some observers to worry that the U.S. is headed toward a significant slowdown. Researchers at the Federal Reserve are slightly more upbeat. According to a report released Wednesday known as "the Beige Book," hiring throughout the country has been relatively steady and even rose modestly in some places.

"Economic growth appears poised to continue at a moderate pace over coming quarters," said Federal Reserve Chairman Ben Bernanke in a prepared statement to Congress Thursday. "In particular, increases in household spending have been relatively well sustained. Income growth has remained quite modest, but the recent declines in energy prices should provide some offsetting lift to real purchasing power."      

Meanwhile, consumers' moods have also been relatively stable, despite some of the more disappointing headlines, says Robert Mellman, a senior economist at J.P. Morgan Chase. "We try to look at consumer confidence and there's a daily consumer confidence reading called the Rasmussen [Consumer Index] and it's holding reasonably stable over the last few months," says Mellman.

Despite dipping in the first two months of the year and then again in April, consumers' debt levels have also increased significantly since September 2011, indicating that they have been feeling better about taking on debt.   

However, after seeing strong gains in the economic recovery, consumers have also faced multiple months of slower than expected jobs growth and that could be dampening their enthusiasm. "It's hard to know whether people will get very worried about that or just read that as a wiggle in the data," says Mellman. 

The economy added just 143,000 jobs in March, 77,000 jobs in April and 69,000 jobs in May, according to the Bureau of Labor Statistics. By contrast, it added 243,000 jobs in January and 227,000 jobs in February.

After seeing the economy rally then appear to fall, some consumers may be feeling more cautious about taking on more debt than they could handle if they lost their jobs or saw their incomes slashed.

"Households and businesses still appear quite cautious about the economy," added Chairman Ben Bernanke in his statement to Congress. "For example, according to surveys, households continue to rate their income prospects as relatively poor and do not expect economic conditions to improve significantly. Similarly, concerns about developments in Europe, U.S. fiscal policy, and the strength and sustainability of the recovery have left some firms hesitant to expand capacity."

That said, economists say that people's job prospects are much stronger than they were before and the economy is still gaining steam, though chugging ahead slowly and choppily. As long as the overall direction remains forward, that could translate into more consumers feeling comfortable about spending again with credit.

"There is no question that while there are many challenges with the economy, it has improved," says Walden. "We've seen most of the economic indicators improved. We've also seen the relative debt position of households improve."

As a result, consumers have significantly more freedom and security now to continue borrowing. However, they are unlikely to borrow as much as they did before the recession once they do resume borrowing significant amounts, adds Walden.  

"I think that what this generation of consumers learned from the Great Recession and the crash is comparable to what the Great Depression generation learned from that downturn," he says. "And that is, you have to be cautious and you can't necessarily assume that the future will be like the past. We're now dealing with a consumer who is much more careful, much more cautious, much more frugal."

See related: Consumer credit card balances shoot up, Consumers are cooling on credit, N.Y. Fed report says

Published: June 7, 2012


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