Research and Statistics

Reversing course again, consumer card balances fall


Consumer credit card balances fell in September after surging the previous month, according to new data from the Federal Reserve

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Consumer credit card balances fell in September after briefly surging the previous month, according to new data from the Federal Reserve.

The Federal Reserve’s latest G.19 consumer credit report, released Wednesday, showed a relatively steep 4.1 percent drop in revolving debt as consumers paid down their credit card balances after padding them significantly in August. Revolving debt, which in the report is made up almost exclusively of credit card debt, fell by $2.9 billion in September to $852 billion.

This is the sixth time this year that credit card balances have reversed course from the previous month. Experts say the up-and-down trajectory that has characterized this year’s monthly data on revolving credit card balances reflects, in part, an unstable economic recovery. Overall, consumer credit card balances have risen this year, but the growth has been extremely slow and has been anything but constant.

“There are good months and bad months [in this economy],” explains Paul Edelstein, director of financial economics at IHS Global Insight. “Our consumer economists like to call [it] fits and starts,” he says.

The economy is moving in the right direction, however. “Right now, we’re in a start,” says Edelstein, referring to the recent spate of positive economic news. But “that could turn into a fit,” he says if the economy unexpectedly stumbles and consumers face another round of bad news. “We’re expecting a fairly good holiday season, but after that it could turn negative again.”

Either way, Edelstein cautions against reading too much into the monthly numbers on revolving debt. For example, we may see credit card balances rise during the holidays as consumers use their cards to fund gift purchases, he says. That doesn’t necessarily mean consumers have reached a turning point and have suddenly become more comfortable with taking on significant amounts of debt.

“If last year’s any guide, we might see a run-up in credit card usage at the end of the year, then it gets paid off early next year,” he says. “I think things are improving and I think consumer spending is growing.” However, banks remain exceptionally cautious about the amount of credit they’re willing to lend, he says, and consumers are showing few signs that they’re willing to take bigger risks than they can handle.

The Fed’s 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 9.2 percent to almost $1.9 trillion in September. Overall consumer credit — the combination of both revolving and nonrevolving debt — also increased, by $11.4 billion, with the steep rise in nonrevolving debt overwhelming the drop in credit card debt. Total consumer credit jumped 5 percent in September to more than $2.7 trillion.

Economy slowly chugging along
The Federal Reserve’s latest G.19 consumer credit report appeared one day after President Barack Obama was elected to a second term as President of the United States and several new congressional members claimed their seats in the U.S. House of Representatives and U.S. Senate.

With the elections over and the officeholders named, it will put to the test the idea expressed by some economists that uncertainty over the election’s outcome had been causing businesses to hold back on hiring.

The unemployment rate currently remains exceptionally high, at 7.9 percent, a number that doesn’t include those who have given up looking for a job. The economy is continuing to add jobs at a slow but steady pace.

The U.S. economy added 171,000 jobs in October, Labor Department said Friday. It also added 148,000 new jobs in September, 192,000 new jobs in August and 181,000 new jobs in July. The recent gains are significantly better than the previous four months, when the economy added an average of just 85,750 jobs per month.

Experts are skeptical that Tuesday’s election will make much of a difference to consumer confidence. However, they say that the recent growth in the economy is encouraging and that if it continues to make steady gains, it could prompt consumers to pull out their wallets more often. Already, consumer spending jumped by nearly a full percentage point (0.8 percent) in September, according to figures released Oct. 29 by the U.S. Commerce Department. Retail spending, in turn, rose by 1.1 percent.

“I would argue that there are three big factors driving this,” says North Carolina State University professor of economics Michael Walden. The number of jobs added to the economy each month is trending in the right direction, he says, giving consumers more confidence about their ability to land a new job if they lose the one they’ve got.

Many consumers have paid down huge debts that were crimping their ability to spend. “Consumers have done what they needed to do and as they move closer to where economists think they need to be, that’s going to help improve their outlook and cause them to spend more,” says Walden.

“The third factor is the housing market,” he says. “I think the housing market has bottomed out.” Home sales are up significantly and so are prices. And that’s “very important for households’ finances,” he says, because higher home prices help boost consumers’ net worth.

See related: Fed: Cards slightly easier to get, but consumers remain cautious, Fed: No rate changes on the horizon until 2015

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