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Fed report: Consumers credit card balances shoot up in May

Up-and-down use of credit mimics sputtering national economy

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Consumer credit card balances shot up in May after tumbling the previous month, according to new data from the Federal Reserve.

The Federal Reserve's monthly G.19 consumer credit report, released Monday, showed a steep 11.2 percent rise in revolving debt as consumers resumed charging to their cards. Revolving debt, which in the report is made up almost entirely of credit card debt, rose by $8 billion in May to $870.2 billion.

Many experts had predicted that card debt would rise. However, "the size of the increase was a bit of a surprise," says Paul Edelstein, director of financial economics at IHS Global Insight. 

A rise in credit card debt is often a positive economic sign, in that it may show consumers are confident enough to tackle more debt. But this may be a temporary blip, experts said: The report covers May, and consumers' hopes have been dampened since then by reports of disappointing job growth.

"Consumers were still feeling pretty good in May, so it's not surprising that they decided to take on some more credit card debt," says Edelstein. However, "We know that consumer confidence took a hit in June. The jobs reports have been terrible. The stock market hasn't been doing very well." It's possible that "some of the bad economic news took some time to catch up" to consumers, he says.

In the past 12 months' reports, credit card debt -- much like the economy -- has bounced around, up seven months and down five. This month marks the single biggest percentage increase in revolving debt since 2007. That fluctuation makes experts doubt the staying power of the latest surge. "I really suspect we're probably going to see softer spending numbers this month and last and we're probably going to see that on the revolving numbers, as well," says Edelstein. 

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 6.5 percent to $1.7 trillion in May. Overall consumer credit -- the combination of both revolving and nonrevolving debt -- also increased, by $17.1 billion. Total consumer credit jumped a sharp 8 percent in May, to $2.57 trillion, the largest amount of debt since August 2008.

Consumers face an uncertain recovery
Consumers may be feeling slightly more optimistic for now. However, they are facing significant economic headwinds and that could make them think twice about spending more than they can afford to pay back, say experts.

"There is a lot of uncertainty out there with regard to how the economy is performing," says Keith Leggett, senior economist with the American Bankers Association. "And that will kind of weigh on consumers, especially with regard to their willingness to take on new obligations."  

The Labor Department announced Friday that the economy added just 80,000 jobs in June, falling short of expectations for the fourth consecutive month.

The unemployment rate, in turn, didn't budge. "The number of unemployed persons (12.7 million) was essentially unchanged in June, and the unemployment rate held at 8.2 percent," said the department in a news release.  It also revised its April and May jobs figures, reporting that the economy added slightly more jobs in May -- 77,000 -- than previously measured and added significantly fewer jobs -- just 68,000 -- in April.

To get a sense of just how anemic those figures are, consider this: The economy added 243,000 jobs in January and 227,000 jobs in February. Add April, May and June figures together and it's only a bit more -- 285,000 jobs. 

Consumers' incomes did at least rise slightly in May, according to the Commerce Department, giving some more room to charge to their cards. Gas prices also fell sharply, allowing consumers to spend that income elsewhere. "The gasoline index fell 6.8 percent, its largest one month decline since December 2008," said the Commerce Department in a news release.

That said, consumer spending was largely flat in May, according to multiple reports. Some economists are confident, however, that consumers will resume spending in the months ahead, which could translate to bigger balances later on.

"The economy thus far is working like an old machine with many fits, starts and even some sputtering," said the National Retail Federation's Chief Economist Jack Kleinhenz in a statement announcing slower retail spending in May. "Overall, though, consumers are benefiting from the slow but steady decline in gasoline prices, and we expect growth will resume and should pick up through the fall."

Consumers continue to pay bills on time
Consumers have also gotten significantly better at paying their bills on time, which economists say is another good sign. Late payments on consumer loans, including credit cards, mortgages and auto loans fell to their lowest level in five years in the first quarter of 2012, according to the American Bankers Association's 2012 Consumer Credit Delinquency Bulletin.

"This is clearly an indication that consumers are doing a better job managing their finances," said the association's Keith Leggett.

However, he cautions, if the economy continues to deteriorate, that could make it harder for them to pay their bills. That's especially true, he says, since many consumers that survived the Great Recession are facing a long-term economic slump with no real safety net. "They are not prepared for the rainy day that may come," says Leggett.

That said, consumers are unlikely to overcharge the way they did before the recession, said Leggett. "The Great Recession kind of changed behavior," he adds. It "really created a culture of savings."

Leggett compares it to the Great Depression when consumers turned thriftier for life after experiencing the worst economic downturn in modern history. This time, he says, a new generation of consumers may be similarly scarred and less likely to take on excessive debt.

Banks court new customers
As more consumers get comfortable with spending at least some of their income on credit, banks are continuing to go after new customers, according to the Ipsos Mail Monitor, which tracks credit card mailings.

Although "all the major issuers cut back in April to a level we had not seen in years," they resumed sending out a larger number of offers in May, said Roy Persson, director of competitive tracking services at Ipsos, in an email.

That said, few issuers changed the terms of their offers, including on promotions. However, there were a few exceptions. For example, "in May, we saw Discover bring back a 24-month balance transfer period," said Persson. Most balance transfer credit cards offer interest-free transfer periods of just six to 12 months, according to CreditCards.com data.

See related: Consumer credit card debt dipped in April, Credit card bonuses playing hard to get

Published: July 9, 2012


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