Consumer revolving debt – which is mostly based on credit card balances – surged by $12.7 billion in December, according to the Federal Reserve’s G.19 consumer credit report.
Total consumer debt – which includes student loans and auto loans, as well as revolving debt – continued to swell as well, rising $22 billion to $4.197 trillion in December, making for an annualized growth rate of 6.3%.
Student loans were at $1.643 trillion for the month, up from $1.637 trillion in September, while auto loans were at $1.192 trillion, gaining from $1.189 trillion in September, when the government last reported these figures.
Employment trends continue to support consumer spending
In the meantime, U.S. employment continues to gain, providing support for consumer spending. The federal government on Feb. 7 reported that the economy added 225,000 jobs in January.
The unemployment rate rose to 3.6%, from December’s 3.5%, as more people entered the labor force, with the participation rate ticking up to 63.4%, from 63.2%. And average hourly earnings for workers were up 3.1% over the year. The government also said that more jobs were added in November and December than it initially reported.
Diane Swonk, chief economist at GrantThornton, noted in online commentary that more than 180,000 workers joined the workforce in January. Considering this, as well as an uneven trend in wage gains, she anticipates that “we still have room to run” in the labor market.
However, she concludes, “The labor market was not as strong as it appeared in the payroll report for January. Unusually mild winter weather distorted the data. Look for slower job gains as the boost created by mild weather dissipates and the blow to travel and tourism from the coronavirus shows up in the February data.”
The positive employment trend also helped stoke consumer spending in the third quarter. The American Bankers Association reported in its quarterly credit card monitor report that credit card use rose in the third quarter of 2019.
James Chessen, ABA’s chief economist, said, “The rise in credit lines across risk tiers reflects a healthy financial base for consumers fueled by a solid labor market and rising wages.”
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Share of those carrying a balance up in Q3
The ABA finds that purchase volumes were up for the more creditworthy from the second quarter, although they dipped 0.3% for those classified as subprime borrowers.
The average credit line for accounts of all credit categories grew from second quarter levels, including for new accounts. Prime consumers saw their credit lines grow 1.4%, with those for new prime accounts rising 1.3%. Still, credit lines are 8% to 22% below “post-recession highs.”
Over the year, prime borrowers boosted their spending 5.5% and super prime borrowers 4.4%. Subprime borrowers’ spending rose at a more sedate 1.9%. The number of new accounts, those opened in the last 24 months, was down over the year as a result of a dip in the number of subprime and prime accounts.
According to Chessen, “Consumers today have more resources, are better able to meet their obligations and are responsibly managing the greater flexibility that a slightly higher credit line provides.”
The share of transactors, or credit card users who pay their balance in full each month, remained steady at about 31%, while the share of those who carry a monthly balance, or revolvers, rose 0.7% to 43.9%. And the share of credit card debt as a percentage of disposable income dipped to 5.31%.
Lenders more cautious about outlook
Although economic trends have been positive for consumers, the Federal Reserve reports that “a moderate net share” of banks tightened their lending standards for credit card loans in the fourth quarter of 2019. These banks looked for higher credit scores, while some banks also clamped down on credit limits. Demand for credit card loans remained steady though, according to the Fed’s opinion survey of senior loan officers on bank lending practices.
These loan officers expect that their standards for credit card loans will be tight in 2020, while they see demand rising for these loans. They also anticipate a decline in performance for credit card loans to subprime borrowers.
The banks that anticipate tightening attribute this to a decline in their risk tolerance, as well as a potential decline in the quality of their loan portfolios.