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Fed: Card balances outstanding continued to decline in May

The pandemic continues to impact consumer credit, but it seems people are more optimistic about the economic outlook


Credit card balances dropped by $24.3 billion on a seasonally adjusted basis in May to $995.6 billion, according to a new report by the Fed. This is the first time since September 2017 that card balances dipped below the trillion dollar mark.

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Credit card balances continued to drop in May with the ongoing impact of the coronavirus pandemic, but the drop off appears to be moderating as consumers feel more optimistic about the outlook.

Consumer revolving debt – which is mostly based on credit card balances – dropped by $24.3 billion on a seasonally adjusted basis in May to $995.6 billion, according to the Fed’s G. 19 consumer credit report released July 8.

This is the first time since September 2017 that card balances dipped below the trillion dollar mark. Card balances had touched an all-time high in February before the coronavirus pandemic started impacting consumer spending and bank lending. In May, card balances fell a steep 28.6% on an annualized basis, after falling 65% in April, after revisions.

Total consumer debt outstanding – which includes student loans and auto loans, as well as revolving debt – dropped off $18.2 billion to $4.112 trillion in May, a decline of 5.3%.

The Fed also reports that the average interest rate on credit cards was at 14.52% in May, compared to 15.09% for February, when it last reported this figure. On cards that carry a balance and paid interest, the average interest rate was at 15.78% in May, down from February’s 16.61%, with the Federal Reserve’s interest rate cuts appearing to be trickling down.

See related: Poll shows many Americans will spend less after than pandemic than they did before

Consumers less concerned about missing debt payments

The Federal Reserve Bank of New York reports in its survey of consumer expectations for May, released in June, that consumers are less concerned about making debt payments than they were in the April survey.

The average perceived probability of missing a minimum debt payment in the next three months was at 12.6% for May, compared to April’s 16.2%. People across all age, income and education levels were more optimistic about their ability to pay debt.

Consumers, however, see their access to credit as diminished, with 49.6% of respondents reporting that credit financing is harder to get than it was a year ago, compared to 48% who felt this way in April. Fewer of the consumers also expect that credit will be easier to obtain in the year ahead.

They were a bit more optimistic in May about their household finances compared to a year ago, and also for the next year, although expectations were still “relatively depressed.” Expectations for household spending rose too, with median expectations for household spending up 0.7 percentage points to 2.9% for May. However, this compares to the year-ago expectation for spending to rise 3.5%. And the disagreement among the consumers about this measure was at a high for the survey.

And after dropping for three months in a row, median expectations for growth in household incomes was up to 2.1% in May, from April’s 1.9%. This is still substantially below the year-ago expectation for growth in income of 2.8%, and 25% of the respondents expect their incomes to dip at least 0.3% in the next year.

See related: Traversing unemployment: Steps to ensuring your financial security


More optimism about labor market outcomes

Respondents appear to be anticipating an improvement in the labor market, looking to a year-ahead growth in earnings of 2%, at the median. There was more uncertainty about this measure, though, and lower income people and those without college degrees were more optimistic.

Fewer people expected to lose their job in the year ahead, with respondents’ expectations for the average probability of losing their jobs down to 18.7% in May, from April’s 20.9%. People were also slightly more optimistic about their ability to land a new job if they did lose their current one.

Respondents anticipate that the level of unemployment in the U.S. will be better in the year ahead. Only 38.9% of consumers, on average, see a rise in unemployment, compared to 47.6% for April.

This comes about as the U.S. labor market situation has gradually improved in May and June. The government reported that the unemployment rate was down to 11.1% for June, from May’s 13.3%. That was an improvement from April’s 14.7%.

An improving labor market could also impact inflation. Respondents to the survey of consumer expectations anticipate a median inflation rate of 3% in the year ahead, up 0.4% from April. However, there was a lot of disagreement amongst the respondents about the inflation outlook.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, is less sanguine about the employment situation.

“The dip in the unemployment rate was less impressive than it looks; yet again the BLS believes it is understated because of people misclassifying themselves as employed but absent from work, rather than unemployed on temporary layoff; this depressed the June unemployment rate by about one percentage point,” he wrote in July 2 e-mail commentary. “The underlying trend right now is invisible beneath the noise, but the surge in unemployment likely will put downward pressure on wage growth for the foreseeable future.”

He expects that jobless claims “are on the verge of tipping back up” as controls on bars and restaurants are put back in due to the pandemic and people also stay safe by remaining at home.

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