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Card balances continued upward march in August, Fed reports

Credit card balances have now gone past the $1 trillion mark that they dipped below during the pandemic

Summary

Consumers believe that credit is easier to access compared to a year ago and anticipate a rise in inflation.

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Credit card balances continued their upward march in August, in tandem with rising retail sales, amidst concerns about the spread of the Delta variant of COVID.

Consumer revolving debt – mostly based on credit card balances – gained $3 billion on a seasonally adjusted basis in August, rising to $1 trillion, according to the Fed’s G. 19 consumer credit report released Oct. 7.

In August, card balances gained 3.6% on an annualized basis, following July’s revised 7% uptick and June’s robust 22.4% growth (after revisions). Card balances have now crossed the $1 trillion mark that they dipped below in May 2020 after a long period of growth, primarily due to the pandemic.

Total consumer debt outstanding – which includes student loans and auto loans, as well as revolving debt – gained $14.4 billion to touch $4.35 trillion in August, a 4% seasonally adjusted annualized rise.

The Fed also reported that interest rates on credit card accounts were at 14.54% (down from 14.61% in the second quarter), and rates on accounts that were assessed interest (because they carried a balance) were at 17.13% (up from 16.3%).

Consumers more optimistic about credit access

Consumers responding to the Federal Reserve Bank of New York’s Survey of Consumer Expectations for August reported that they were slightly more optimistic about their ability to access credit compared to a year ago. However, they were more cautious about the ease of credit access in the year ahead.

They were also more confident about their ability to service their debt, with the average perceived probability of missing a minimum debt payment in the coming three months dropping 0.7 percentage points to 9.6%. This positivity was broad-based and seen across all age, income and education groups.

Household incomes seen growing, inflation expectations rise

Consumers have a median expectation that household income will grow 0.1 percentage point to 3%, which is a high for this survey. Those with household incomes below $50,000 were most optimistic. Even then, expectations for growth in household spending dipped slightly to 5%, from July’s 5.1%. Still, this measure remains high compared to pre-pandemic levels. And fewer households anticipate that their financial situation will be worse in the year ahead.

Inflation expectations touched a new high for the survey and have been rising for 10 months in a row. Respondents have a median expectation that inflation in the year ahead will rise 0.3 percentage points to 5.2%. Three years out, the respondents expect inflation to touch 4%. Expectations for an inflation uptick spanned all age and income groups. However, respondents were more uncertain about future inflation outcomes.

There is some debate about whether a recent uptick in inflation is short-lived or will linger (an inflation gauge that is based on personal consumption expenditures rose 4.3% in August over the previous year, and was up 3.6% when the volatile food and energy categories were excluded).

Federal Reserve Chairman Jerome Powell has been of the view that the recent hike in inflation is “transitory” and is based on the recovery from the pandemic. The Fed is keeping a watch on consumer expectations for inflation, which could influence the actual inflation outcome.

Labor market outlook is mixed

Respondents have a median expectation that their earnings will grow 2.5% in the coming year, a drop of 0.4 percentage points. Those above the age of 40 led this decline. They also are more inclined to see an uptick in unemployment, with 35% on average anticipating this, a gain of 3.3 percentage points.

The average expected probability of losing one’s job in the coming year was up to 12.4% in August, from July’s 12.2%, but remains near a low for this survey. The likelihood of a consumer voluntarily quitting a job also rose to a mean probability of 20%, from 19.7%. However, consumers are less optimistic about landing new jobs if they lose their current ones, with the average probability for this outcome down to 54.9%, from July’s 57%. Respondents above the age of 60 were at the forefront of this increased pessimism.

ADP survey points to gain in private sector jobs

An employment forecast for September from ADP, anticipating the government’s Oct. 8 employment report, looks to a 568,000 gain in private sector jobs. This forecast (based on a model that factors in data from employers that use ADP’s payroll processing service, macroeconomic variables and the previous month’s government employment report) is above the consensus expectation for a 430,000 gain, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.

In his daily economics commentary for Oct. 6, Shepherdson notes, “We’re sticking to our view that Friday’s report will show payrolls rose by about 500K,” with the caveat that the net risk is of more jobs being added than he anticipates.

Diane Swonk, chief economist at Grant Thornton, anticipates that the private sector will add 350,000 jobs for September. She noted, “The flooding that hit the Northeast as a result of Ida was very disruptive last month. It adds insult to injury to supply chain interruptions associated with the pandemic and will likely take a toll on manufacturing employment, including vehicle plants.”

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