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Fed: Card balances fell by $3.1 billion in January

Meanwhile, the federal government’s employment report for February shows the economy added a robust 273,000 jobs

Summary

Consumer revolving debt – which is primarily credit card balances – decreased by $3.1 billion in January, according to the Federal Reserve’s G.19 consumer credit report.

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After a big surge in credit card spending for December, it seems consumers took a break from their holiday spending in January, though the economy continued to add jobs.

Consumer revolving debt – which is mostly based on credit card balances – dipped by $3.1 billion on a seasonally adjusted basis in January to $1.09 trillion, according to the Federal Reserve’s G.19 consumer credit report. Card balances were down 3.3% on an annualized basis.

Total consumer debt – which includes student loans and auto loans, as well as revolving debt – continued to swell though, rising $12 billion to $4.2 trillion in January, making for an annualized growth rate of 3.5%.

See related: Threats to the credit card market unfounded

Evolving coronavirus situation clouds outlook

In the meantime, the federal government’s employment report for February shows that the economy added a robust 273,000 jobs. The unemployment rate dropped to 3.5%, from January’s 3.6%, even as the number of working age adults employed or actively looking for work held steady at 63.4%, a sign that more people are finding jobs.

The government also revised up January and December job gains by 85,000. And average hourly earnings were up 0.3% month-over-month, and 3% year-over-year. The strong employment report certainly shows promise for continued consumer spending.

However, that report is based on input from before the coronavirus panic ensued, and that clouds the outlook. Diane Swonk, chief economist at Grant Thornton, noted in online commentary that job gains in the leisure and hospitality sectors should better position workers in those industries against any layoffs tied to the coronavirus fears.

“The weakness in transportation is more insidious as it is a precursor of what’s to come in response to supply chain disruptions associated with COVID-19,” Swonk wrote. “Imports from China plummeted in February and early March, which took a toll on some of our largest ports.”

And Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted in his daily economic commentary, “Overall, these are great numbers, but unfortunately this is news from another planet, and it does not mean that the Fed was wrong to cut rates this week. The survey was conducted in the week ended Saturday, Feb. 15, four days before the market peaked.”

Pantheon is expecting a coming slowdown in overall hiring to hit the March employment number, though there are no signs that rising layoffs will make the situation worse. It could worsen in April, though.

See related: Tax refund poll: 31% of Americans expecting a refund plan to save it

Fed acts to support economy

In a bid to support the economy and ward off a potential recession, the Federal Reserve slashed its target interest rate by 50 basis points to the 1.0% to 1.25% range.

The action was taken on March 3, in between regularly scheduled meetings of the rate-setting Federal Open Market Committee, as the Fed wanted to provide immediate support. In its statement relating to the rate cut, the Fed noted that while the economy remains fundamentally strong, the coronavirus poses “evolving risks to economic activity.”

In a related press conference, Fed Chair Jerome Powell said the Fed expects the economy to return to solid growth and support the labor market. While the Fed action will help, he expects that the “ultimate solutions will come from others.”

He sees a need for concerted action on fiscal policy (relating to government spending and taxation) and health care policy, in addition to monetary policy support from the Fed.

Swonk identified one area in which fiscal policy could make a difference. She noted in online commentary, “One of the largest concerns is the lack of paid sick-leave for food service workers, who could increase the risks of contamination as they can’t afford to stay home when they are sick. This is an area that fiscal policy could play a role to slow the impact of the virus on the economy, long-term.”

Grant Thornton is anticipating a global recession as the coronavirus impact continues to interfere with economic activity worldwide, hitting consumer spending and global production.

While the rate cut will not fix broken supply chains, Powell expects it will help avoid a slackening of business confidence and also aid in boosting consumer confidence. The Fed will continue to use its tools as required “depending on the flow of things.”

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Credit Card Rate Report Updated: April 1st, 2020
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14.07%
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15.85%
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16.16%
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16.06%
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15.87%

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