Consumer credit card balances edged higher in October, defying experts’ expectations, according to new data from the Federal Reserve.
The Federal Reserve’s latest G.19 consumer credit report showed a 0.6 percent rise in revolving debt as more consumers let their credit balances swell. Revolving debt, which is made up almost entirely of credit card debt, rose by $300 million in October to $792.3 billion. The increase surprised experts who expected that consumers would remain cautious before breaking out their cards for the holidays.
Experts’ conservative predictions are easy to understand given previous G.19 reports. The Fed reported last month that card balances had decreased for three straight months. However, the agency frequently revises its data and revised its September numbers upward this month. The result: October’s increase means that credit card balances have gone up for two straight months for just the second time since the recession began in 2008.
“It could mean that consumers are feeling more confident about using their credit card and pulling their credit card out of their wallet,” says Gregory Daco, senior economist with IHS Global Insight. Or it could mean they are finally ready to buy items they’ve been putting off due to a recessionary climate that’s lasted four years.
“American households have been in either recession mode or recovery mode for about four years now,” says Daco. “There is pent-up demand for goods that is very gradually coming out. Consumers who weren’t able to purchase a fridge or a dishwashing machine or a car … may decide that now is the time to make those purchases because their situation has improved slightly.”
The Fed’s monthly G.19 consumer credit report also looks at nonrevolving debt, which includes auto loans, student loans and loans for mobile homes, boats and trailers. Nonrevolving debt went up 5.3 percent to $1.67 trillion. Overall consumer credit — the combination of both revolving and nonrevolving debt — also increased for the second straight month, after seeing a rare decline in August. Total consumer credit jumped by 3.7 percent in October, hitting $2.46 trillion.
Pent-up consumer demand
Despite a bleak economic backdrop and sour national mood, consumers appear to be feeling more confident about letting loose with their spending. Retail sales rose 0.5 percent in October, according to the Commerce Department, and early sales reports from Black Friday and Cyber Monday reported by Thomson Reuters indicate that sales grew further in November as shoppers took advantage of steep discounts.
“Consumer confidence levels are still at recessionary levels, but we’re still seeing spending,” says Daco.
Consumer confidence levels declined sharply in October, according to the Conference Board’s Consumer Confidence Index, after suffering a steep plunge in August and recovering just slightly in September. Meanwhile, the unemployment rate remained high in October, according to the Labor Department. Experts predicted that consumers would respond to this poor economic climate by remaining cautious in October and keeping their cards in their wallets.
Cardholders have fitfully reduced their credit card balances since the peak of the recession and have largely avoided taking on high-interest debt in an uncertain economy. But those long years of frugality may have finally pushed consumers to the brink, says Tony Plath, a professor of finance at the University of North Carolina at Charlotte.
“We’ve been unemployed for four years, we’ve been on an austerity budget, and now people are just getting weary of not spending money,” says Plath.
Consumers’ conservative spending habits may have also given them a little more breathing room to spend more going into the holidays, says Plath. “People have a little bit of wiggle room,” says Plath.
Plath expects a temporary increase in holiday spending, but he says that spending will likely screech to a halt in 2012 when consumers confront bigger credit card balances and an economy that can’t rebound fast enough to keep up.
“There’s a psychological pent-up need to shop,” says Plath. As a result, we could see “a temporary return to consumer patterns we saw in 2006 and 2005 where people shop \u2018till they drop. Essentially, it’s a little shot of nostalgia for the good old days.”
However, “come March and April, this nostalgia will see a wake-up call from a sick economy,” says Plath, and consumers will once again realize that overspending in a weak economy is “not sustainable.”
Experts predict that increased spending toward the end of 2011 could also lead to higher bank losses in 2012 as more consumers struggle to pay their credit card bills.
“Historically and traditionally, what happens is that during the holiday season people go in and shop and then six to seven months [later], you see an increase in losses,” says Dennis Moroney, research director in the bank cards division with advisory services firm TowerGroup.
Lingering unemployment and stagnant wages may also be pushing card balances up, say experts. Consumers may want to be more cautious, but may feel forced to use credit to pay the bills.
“With continued high unemployment rates, people really start to use their credit cards as a means of financing their living expenses,” says Moroney.
Personal income rose 0.4 percent in October, according to the Commerce Department. However, Daco notes that when you factor in the increased cost of living, the amount that consumers have left to spend is actually less. “If [consumer] income is adjusted to the cost of life, it means they’re not earning as much as in the prior quarter.” says Daco. That makes it harder for consumers to pay for what they need without relying on a credit card.
Some experts also predict that as issuers begin to loosen their lending standards, card balances could grow as a result. “I think you’re going to see more people with spotty credit receiving card offers,” says Howard Dvorkin, chief executive of the nonprofit counseling and debt management company ConsolidatedCredit.org. “That will expand the offers and you’ll see more people overall using credit cards.”