Credit card balances rose in January, as a fiscal cliff cut in take-home pay and higher prices at gasoline pumps caused consumers to lean more on their plastic.
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But overall consumer debt, including revolving and nonrevolving loans, rose more strongly — 7 percent in January, on top of December’s revised 6.6 percent increase, the U.S. Federal Reserve said in its latest G.19 consumer credit report.
“Mainly that (increase) was driven by student loans, where the risk is being picked up by the federal government” said Keith Leggett, senior economist at the American Bankers Association.
Revolving debt, which is chiefly made up of credit card debt, rose to $850.9 billion, after falling a revised 4.4 percent in December to $850.8 billion.
First look at 2013, consumers and debt
The first look at debt markets of 2013 came amid economic crosscurrents that were pulling consumers in different directions, economists said.
Overall consumer debt including cards plus auto loans and student loans was $2.795 trillion in January, up from $2.779 trillion in December on a seasonally adjusted basis.
For the full year of 2012, revolving debt was up 0.4 percent and nonrevolving debt was up 8.4 percent.
“People saw a reduction in their income because of the payroll tax increase,” said Leggett. The expiration of stimulus measures meant a 2 percentage point increase in payroll taxes in January, causing a direct hit to take-home pay.
Personal income fell even more than expected in January, the government said, posting a 3.6 percent drop from December, although consumer spending was able to eke out a 0.2 percent increase.
At the same time gas prices – which act like a tax on incomes in the short run – rose from already elevated levels. The national average for a gallon of regular climbed from $3.32 to about $3.70 during January, according to the AAA Daily Fuel Gauge Report.
“You wouldn’t expect people to take an immediate hit in their standard of living,” said Mesirow Financial Economist David Nice. The crimped incomes will put upward pressure on card borrowing through February and taper off in March, he said, as household budgets adjust.
That hit to income ran into consumers’ widespread caution, which got new fuel from economic fears about the government’s sequester. The sharp cut in federal spending that began Feb. 1 received widespread media attention in January, putting a cloud over expectations about the economy’s performance for the rest of the year.
Overall consumer debt, including revolving and nonrevolving loans, rose by a seasonally adjusted 7 percent in January, jumping $161 billion to $2.795 trillion. For the full year of 2012, revolving debt was up 0.4 percent and nonrevolving debt — boosted by car loans and student loans — was up 8.4 percent.
The January look at consumer debt follows a headline-grabbing report from the New York Federal Reserve Bank saying that signs of healing were apparent in consumer debt markets at the end of 2012. The combined total of household credit — including mortgage loans — turned upward in the fourth quarter for the first time since the recession ended in the spring of 2008, Fed economists said in February, supported by stability in mortgage lending and growth in student loans, car loans and credit cards.
Trends point to more turmoil
Households’ spending muscle will have to fight against more worries as the year goes on, but it should get a lift from improving conditions in the core markets of jobs and homes, economists said.
“We have a lot of countervailing forces out there,” Leggett said.
The federal sequester could become more than the looming threat it was in January and bring an actual hit to incomes, especially in households that rely on paychecks from government contractors or the federal government itself, Leggett said. The Congressional Budget Office has estimated that the $85 billion cut in federal spending this year could cost the economy 750,000 jobs in 2013.
However, jobs so far have continued to show their slow improvement trend, potentially increasing confidence for spending. The U.S. Labor Department said Thursday that initial unemployment claims are down, with the four-week average falling 7,000 to 348,750 to its lowest point since March of 2008.That set the stage for upbeat expectations for the widely watched monthly unemployment report for February, to be announced on Friday. Consensus estimates predict an increase in payrolls above January’s addition — but not enough to lift the 7.9 percent jobless rate, Bloomberg News reported.
Another bright spot in the economic picture comes from the stock market, where the Dow Jones Industrial Average has posted new all-time highs in recent days. Although the broader market measure of the Standard & Poor’s 500 remains below previous highs, the news about the Dow may provide a lift for expectations as well as an increase in household wealth for consumers who are sitting on stocks and stock mutual funds.
“As people get their 401(k) statements in the mail, they always like to see their number increasing,” said Nice of Mesirow Financial. Signs of a turnaround in the housing market are an even more important confidence boost, he added
“As people become more confident in the economy moving forward,” he said, “they’re more free to spend.”
See related: Credit card balances slide to end 2012