Research and Statistics

Credit card balances ratchet up in October


Consumer credit card balances picked up in October after falling the previous month, according to the Federal Reserve’s latest G.19 consumer credit report

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Consumer credit card balances picked up in October after falling the previous month, according to the Federal Reserve’s latest G.19 consumer credit report.

Revolving debt — which in the report is mostly made up of credit card debt — increased by 4.7 percent in October to $858 billion.

This is the fourth month this year that consumer credit card balances have risen. Overall, cardholders have added just $9.1 billion in debt since January — a relatively paltry change that stands in sharp contrast to both before the recession, when card balances shot up, and immediately after it, when they rapidly fell.

Experts say that consumers are gradually feeling more confident about the overall direction of the slow-moving economy, with consumer confidence hitting a five-year-high in October.

However, consumers have remained stubbornly reluctant to charge more to their credit cards than they could afford to quickly pay back and have been less than eager to expand their access to credit for most of the year.

“A lot of households are just very cautious about taking on additional debt,” says David Ely, a professor of finance at San Diego State University, especially since many still aren’t done paying back the debt they already have.

Experts say the latest rise in revolving debt may be a sign that consumers are feeling more confident about how much card debt they can afford to take on, particularly during the holidays.

“I think people are just tired of feeling bad,” says Anthony Plath, a professor of finance at the University of North Carolina at Charlotte. So they are spending more on credit, despite lingering economic uncertainty. “It’s an emotional response to a prolonged economic downturn.”

That said, October 2012 was an unusual month, caution experts, making it difficult to draw any long-term conclusions from the most recent crop of data. “Economic numbers that come out over the next couple months, I think we want to be a little cautious of,” says San Diego State University’s Ely.

The massive storm, known as Superstorm Sandy, swept across much of the East Coast in the last week of October, affecting such a large swath of the U.S. population that consumer spending figures were likely impacted.

For example, many people may have temporarily increased their spending in October because they were stocking up on supplies before the storm, says David Nice, an associate economist with Mesirow Financial in Chicago.

Others may have reduced how much they spent in October because they were stuck in their homes for several days or more, he says. “If you can’t go out and shop, spending is going to be down. You can’t take on debt.” Either way, “October is going to be an outlier based on the storm,” says Nice.

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 6.9 percent to $1.9 trillion in October. Overall consumer credit — the combination of both revolving and nonrevolving debt — also increased 6.2 percent to approximately $2.8 trillion.

Economy picks up a light steam
Through most of 2012, consumers have faced a wobbly economy with numerous starts and stops. However, things may be picking up, according to the latest string of economic data.

The economy added 146,000 jobs in November, pulling the unemployment rate down to 7.7 percent, according to new figures released Friday by the Labor Department.

Some economists predicted that Superstorm Sandy would muddy November’s unemployment estimates, since the damage in some areas, such as New Jersey, was so severe. However, the storm’s impact on jobs did not appear to be substantial, said the Labor Department in a special note included with the release.

[Consumers] want to celebrate Christmas. Even if they don’t have the money to celebrate it, damn it, they’re going to do it.

— Anthony Plath
Professor of finance, UNC-Charlotte

The Labor Department did revise downward estimates about employment growth from previous months. The number of jobs created in October, for example, was revised down from 171,000 to 138,000. The number of jobs created in September was revised down from 148,000 to 132,000.

Even with the slightly smaller jobs estimates, however, the labor market has grown substantially stronger in the past five months, adding 789,000 new jobs since July, bringing the overall growth in jobs since January 1 to approximately 1.7 million.

The stronger jobs numbers bode well for consumer spending, say experts. Consumer spending strengthened considerably over the summer, before dipping for the first time in five months in October, according to the Commerce Department.

“As more people get more confidence in the job market, and we have had a couple of good months in a row, you do see people go out and buy bigger ticket items,” says Mesirow Financial’s Nice.

That said, the economy is still not adding as many jobs as the economy needs to grow more robustly — and the looming fiscal cliff threatens further growth, say experts.

Already, the possibility that Congress may fail to stop the automatic series of spending cuts and tax increases scheduled for Jan. 1 has held many businesses back from investing in new staff or fresh supplies, say experts.

“Right now, I believe business confidence is relatively low compared to consumer confidence,” says Nice. The lingering uncertainty over whether or not Congress will reach a deal is especially damaging, he says. “If corporations were able to know the answer, they’d be able to prepare for it,” says Nice.  But right now, they’re stuck in the same waiting pattern that they’ve been in for months.

“If you have a deal on the fiscal cliff, I think you’d see business confidence rise and be more in line with consumers,” says Nice.

Consumers, meanwhile, don’t appear to be reacting to news about the fiscal cliff quite yet, say experts. But it’s highly likely they will sharply curb their spending in early 2013 if a deal isn’t reached and their taxes substantially rise.

In the short-term, that could cause a temporary bump in credit card debt, says Nice, as consumers try to make up for the sudden loss in take-home pay. “Let’s say taxes do go up, consumers will fight that in a way,” says Nice. “They want to keep their standard of living the same, so they may take on more credit card debt in order to kind of smooth out the tax increase and the lower disposable income they may have.” But their overall spending will likely decrease.

Meanwhile, credit card spending may also shoot up in November and December as more people shop for the holidays, says the University of North Carolina’s Plath. Consumers “want to celebrate Christmas,” says Plath. “Even if they don’t have the money to celebrate it, damn it, they’re going to do it.”

That extra credit card spending won’t last for long, however, if Congress fails to avert the fiscal cliff, he says. “I think people are in denial right now,” says Plath. But “if we fall off that cliff, it’s going to be brutal.”

See related:Financial Cliff Calculator

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