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Fed reports card balances rose in May

Consumers resumed adding to card balances as the economic re-opening seems to have boosted spending

Summary

A New York Fed survey finds that inflation expectations are up, while consumers are more optimistic about household income growth and spending as the economy continued to add jobs.

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Credit card balances swelled in May as consumers tired of paying down their debt and started spending more as the re-opening economy and COVID easing allowed for more activities.

While retail sales for May were down 1.7% from April numbers, they rose a hefty 24% from year-ago levels.

Consumer revolving debt – which is mostly based on credit card balances – gained $9.2 billion on a seasonally adjusted basis in May to $974.6 billion, according to the Fed’s G. 19 consumer credit report released July 8. In May, credit card balances rose 11.4% on an annualized basis, following April’s revised 1.2% decline and March’s revised 1.8% gain.

Card balances dipped below the $1 trillion mark in May 2020, on the pandemic effect, for the first time since September 2017.

The Fed also reports that credit card interest rates were at an average 14.61% for all accounts (it was at 14.75% in February, when the Fed last reported this input), and 16.30% (15.91% in February) for those accounts that were charged interest since they carried a balance.

Total consumer debt outstanding – which includes student loans and auto loans, as well as revolving debt – gained $35.3 billion to rise to $4.279 trillion in May, a 10%  seasonally adjusted annualized rise.

Consumers more optimistic about credit environment

It seems consumers are more optimistic about their ability to make their minimum debt payments, with the average perceived probability of missing these payments in the coming three months down 0.3 percentage points, to 9.7%, for consumers responding to the Federal Reserve Bank of New York’s Survey of Consumer Expectations for May. This is also below the average for the last 12 months of 10.3%.

This confidence comes about as they also expect, at the median, that their income will gain 0.4 percentage points, rising 2.8%, the highest expected level since January 2020. Those with household incomes of higher than $100,000 led this rise. The same cohort led the expectation for median household spending to grow 5%, up from April’s 4.6%.

It seems the respondents (consisting of about 1,300 household heads) are also more sanguine about their ability to access credit compared to a year ago, though they are slightly less optimistic about access to credit in the year ahead. More respondents also saw themselves as being financially less well-off than they were a year ago. And fewer respondents expect their financial situations to improve in the coming year.

See related: Consumer spending statistics

Inflation expectations rise

On the inflation front, respondents expect inflation to rise 0.6 percentage points, at the median, to 4% in the year ahead, a new high for this survey. For the three-year ahead horizon, consumers see inflation going up 0.5 percentage points, to 3.6%, the second-highest level for the survey (after August 2013).

The expectation for higher inflation was more noted amongst those age 60 and older and also those educated to high-school level or lower. There was more disagreement amongst the respondents about inflation expectations for the year ahead than for the three-years ahead period.

Respondents expected inflation to go up in the year ahead for all commodities. They anticipate that food prices will rise 2.2 percentage points to 8%, while rent will gain 0.3 percentage points to 9.7%,  a new survey high for both these inputs.

And they see gas prices rising 9.8% and costs for medical care up 9.4%.

Labor market outlook improving

On the labor market front, respondents expect their earnings to grow 2.5% (up 0.4 percentage points) at the median, in the year ahead. Those educated to high school level or lower led this rise.

And these consumers’ mean expectations for the unemployment rate to be higher in the coming year were down to 31.9% (a low for the series), from April’s 34.6%.

They are also more optimistic about holding on to their jobs, with the average probability for losing a job dipping to 12.6%, another low for the survey, from April’s 15%. Those educated to high school level or lower, those with household incomes of $50,000 or less and those younger than 40 led this decline.

While respondents would be less likely to voluntarily leave a job, with a mean probability of 18.7% for this outcome (led by those above age 60 and those with a high school diploma), they were much more optimistic about their prospects for landing a new job if they did lose their current one.

See related: Fed maintains near 0% rate target at June 2021 meeting

U.S economy continued to add jobs in June

Their optimism appears to be borne out by the Bureau of Labor Statistics’ June employment report, which finds that the economy added 850,000 jobs for the month. The unemployment rate edged up to 5.9%, from 5.8%, while the labor participation rate (consisting of employment-age adults who are either employed or actively looking for a job) remained at 61.6%.

The leisure and hospitality sector led the job gains, adding a whopping 343,000 jobs, no doubt feeling the need to add workers as demand for leisure activities from consumers cooped up during the pandemic took off. The retail sector, another major gainer, added 67,000 jobs and temporary help jobs (a pointer for job gains ahead) grew 33,000.

Average hourly earnings for all private-sector workers rose 0.3% to $30.40. The government also revised down its job figures for April by 9,000 while revising up the May gains by 24,000. Together, the revisions resulted in an additional gain of 15,000 jobs for the two months combined.

Commenting on the jobs report, Diane Swonk, chief economist at Grant Thornton, noted in online commentary, “Employment is regaining ground lost to the crisis. We still have a long way to go, especially in leisure and hospitality, which was hit hardest by the crisis. Wages for low-wage workers are surging as consumers scramble to spend and ramp up faster than workers are able or comfortable returning to work.”

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