Fed: Card balances rise for a 5th straight month


Credit card balances increased once again in July, marking the fifth straight month of rising card debt this year, the Federal Reserve said Monday.

Revolving debt grew at a 7.4 percent annual pace in July, up from a revised 2.5 percent pace in June, according to the Federal Reserve's preliminary G.19 report on consumer credit. Revolving debt is predominantly composed of credit card balances.

Total consumer debt rose 9.7 percent in July to approximately $3.24 trillion, $880.5 billion of which was revolving debt. That's the largest increase since July 2011. Total consumer debt includes car loans, student loans and revolving debt, but excludes mortgages, representing the short-term credit obligations consumers hold in a given month. All figures are seasonally adjusted to account for expected out-of-the-ordinary fluctuations that may occur, such as back-to-school or holiday seasons.

However, despite a continued uptick of card balances, consumer spending decreased in July for the first time this year, down about $13.6 billion (0.1 percent) after a revised $50.5 billion (0.4 percent) increase in June, according to the Commerce Department.

July's consumer spending figures are an abrupt change to the year's otherwise consistent, positive trend, but economists aren't concerned yet. Consumer spending typically reflects other economic trends, such as wage gains and job market growth. So, as other monthly economic reports paint a picture of slow-to-little summer spending, July's totals aren't much of a surprise, according to Michael Dolgea, senior economist with TD Bank.

"This decrease has come after several months of strong growth following a pretty miserable winter, so yes, it's a drawback to some extent," he said. "But people will start borrowing and spending again once they become more comfortable with their job prospects. There's just not a whole lot of momentum to support spending right now."

Minimal job, wage growth
In addition to diminished consumer spending, July's card balance increase comes amid less-than-enthusiastic signals from other parts of the economy.

The pace of growth in personal income data slowed sharply compared to previous months. Average personal income rose only 0.2 percent in July, compared to 0.5 percent growth recorded in May and June, according to the Commerce Department.

Job growth remained steady in July with a total 209,000 new jobs created, but August figures tell a different story.

Job growth last month, while still positive, slowed -- one of several aspects of the most recent employment report that fell short of economists' hopes and expectations. Employers created only 142,000 jobs in August, a much lower total than the average monthly gain of 212,000 over the past year.

The unemployment rate also hardly changed, down slightly to 6.1 percent from 6.2 percent in July, the Labor Department said.

Additionally, an overall lack of wage gains indicates the labor market has a way to go before it is fully healed. Average hourly earnings rose by 6 cents in August to $24.53, bringing the gains made this year to only 2.1 percent -- just enough to keep pace with the past year's 2.0 percent inflation.

However, the August job report should be taken with a grain of salt, according to Richard Moody, chief economist for Regions Financial Corporation.

"No one single piece of data is ever, in and of itself, a game changer, and the August employment report is no exception," he said in a Sept. 5 economic update.

Despite the low job headline number, the six-month average job growth number is still above 200,000 -- an indicator that positive underlying market trends did not change in one month's time. Economists expect future report revisions to move August job numbers closer in line with overall trends, a common occurrence after months of sizable high or low initial reports.

"If, as we expect, job counts are revised higher, so will aggregate earnings, which will fuel further improvement in personal income," Moody added.

Balance-carrying cardholders in particular should take advantage of a little extra time these recent report figures may give them to pay off debt before any future interest rate hike.

The Federal Reserve controls the federal funds rate that affects the prime rate, which is tied to most of the credit card industry's variable interest rates. The federal funds rate was cut during the recession to help stimulate the economy, but will go up once the Fed decides the economy is healthy enough to handle higher rates.

The recent lack of growth -- especially of wages -- may give the Fed good reason to further delay the anticipated hike. Lack of any evident wage pressures supports the belief shared by Federal Reserve Chair Janet Yellen and much of the Federal Open Market Committee that the labor market still has a way to go before it's fully healed, according to TD Economics report by Dolgea.

"With further improvement in the labor market, wage gains should materialize in the coming quarters, but the Fed's first rate hike is still likely a year away," he said in the report.

See related: Fed: Card balances rise, keep pace with slow spending growth, What an interest rate increased will cost cardholders

Published: September 8, 2014

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