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Consumer debt rose, but card balances fell by $1.1 billion in September: Fed

The ABA reports that credit card use rebounded in the second quarter, following a first quarter slowdown

Summary

Consumer spending continues to drive the economy, but risks include subpar inflation, with inflation expectations down.

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Consumer revolving debt – which is mostly based on credit card balances – dipped $1.1 billion on a seasonally adjusted basis in September to $1.077 trillion, according to the Fed’s G. 19 consumer credit report. Card balances were off about 1.2 percent percent on an annualized basis.

Total consumer debt – which includes student loans and auto loans, as well as revolving debt – was up $9.5 billion to $4.149 trillion in September, making for an annualized growth rate of about 2.75 percent.

Student loan debt has increased by $33 billion to $1.638 trillion since the Fed last reported it in June. Auto loan balances have increased by $21 billion to $1.193 trillion since June.

See related:  Poll: 61 percent with credit card debt are willing to get in deeper for the holidays

Consumers continue to turn to credit cards

The American Bankers Association reports that credit card use rebounded in the second quarter, after slowing in the first quarter of the year. The banker trade group’s quarterly credit card market monitor report, released in November, finds that seasonally adjusted spending across all credit categories rose in the second quarter, and was also up compared to last year’s second quarter.

“Subprime” and “superprime” credit category consumers drove the annual increase, with spending for each of these categories rising more than 5 percent, while consumers in the “prime” credit category notched up their spending a modest 1.6 percent.

New accounts (those opened in the last 24 months) dipped in the second quarter, down 2.5 percent from a year ago, making for a sixth decline in a row. This is the result of a decline in new subprime accounts, down 6.1 percent, and prime accounts, off 8.4 percent, with both these categories down to their lowest level in about four years.

However, the total number of credit card accounts gained 2.5 percent from a year ago, thanks to an ongoing rise in the number of superprime accounts. The number of subprime accounts as a share of total accounts was at its lowest level in about four years, though.

See related:  What recent bank earnings say about you, and what to do about it

Share of those not carrying balance at highest level since 2008

Dan Smith, executive director of ABA’s card policy council, said, “Consumer spending rebounded in the second quarter, and low unemployment and solid wage growth should keep consumers on solid footing through the end of 2019. At the same time, new account generation is moderating in the prime and subprime risk tiers as issuers take a more cautious approach as they monitor economic data.”

In another manifestation of prudent card usage, the share of transactors, or those who pay off their balances in full each month, rose 1 percentage point to 31.1 percent in the second quarter.

This number is at its highest level since 2008, the ABA reports. The share of those who carry a balance, or revolvers, was down 1.3 percentage points to 43.2 percent.

Credit card debt as a share of disposable income was up four basis points to 5.33 percent, and has stayed at about this level for six years.

“Credit card debt remains quite low relative to income,” Smith said. “Consumers appear to be well-positioned to meet their financial obligations in the months ahead.”

Inflation expectations down

Although consumers continue to drive the ongoing economic expansion, the Federal Reserve lowered its target interest rate 0.25 percentage points at its October meeting to deal with other risks. For one, inflation is still running below the Fed’s 2 percent target.

The Federal Reserve Bank of New York reported in its survey of consumer expectations for October that median short-term expectations for inflation are at their lowest level since June 2013 (when it started the survey).

Consumers anticipate that inflation a year ahead will run 2.3 percent, down 0.2 percentage points. Those in the 40 years or older age group were more inclined to anticipate lower inflation, along with those whose household incomes were $50,000 or higher.

Looking three years ahead, the median inflation expectation was at 2.4 percent, which is another low for this survey.

In his press conference following the October FOMC meeting, Fed Chair Jerome Powell said the central bank is acting to avoid disinflation pressures, such as Japan has experienced for many years. Europe has also been affected by disinflation in recent years.

Considering that the U.S. is not immune from “significant disinflationary pressures worldwide,” the Fed is looking into various innovative ways to anchor inflation at its 2 percent goal, Powell noted.

See related:  Credit cards pull even with mortgages as top source of debt, study shows

Employment growth continues

The New York Fed survey also found that consumers were less optimistic in their earnings outlook, expecting, at the median, that wage growth would be at 2.3 percent, just even with inflation expectations.

However, on average, fewer respondents, at 36.8 percent, expected that the unemployment rate will rise in the next year. The number of those who felt that they were at risk of losing their job in the next year was up 1.4 percentage points to an average 14.8 percent, though.

According to the government’s October jobs report, the U.S. economy added 128,000 jobs, with the unemployment rate steady at 3.6 percent. The participation rate, which counts working age adults who are employed or actively looking for work, had edged up to 63.3 percent, an indication that more people are being drawn into the workforce.

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Published: November 7, 2019

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