Credit card balances rose in February as consumer spending increased, despite the specter of pending budget cuts
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Revolving debt, which is chiefly made up of credit card balances, rose $500 million in February, following January’s $1.7 billion increase, the U.S. Federal Reserve said in its latest G.19 consumer credit report.
The amount of outstanding revolving debt was $848 billion, compared with a revised $847.5 billion in January.
Overall consumer debt, including cards plus auto loans and student loans, rose $18.2 billion to reach $2.8 trillion in February, compared to $2.78 trillion in January.
“Clearly the stock market is up and home prices are up,” said Jim Johannes, director of the Puelicher Center for Banking Education at the University of Wisconsin. “That makes households more comfortable about spending.” The S&P 500 was on an upward trajectory through the first quarter and reached a new record by the end of March, besting its previous peak reached in October 2007. Higher stock prices don’t necessarily put more dollars in consumers’ pockets, but the swelling numbers on mutual fund statements increase confidence about spending.
Mixed backdrop for card spending
The February consumer credit figures came against a backdrop of improving economic fundamentals that month, but concerns are rising about the looming impact of federal budget cuts and a sharp slowdown in job creation in March.
The sequester, or automatic cuts in spending levels enacted as part of a debt-limit deal, began March 1. Cuts of $85.4 billion are scheduled for 2013, mainly in discretionary defense and domestic spending. The Congressional Budget Office projects that the reduction will cost the economy 750,000 jobs this year. Federal workers are just beginning to face furloughs under the sequester, as departments slim down to meet cuts of 7.9 percent in defense and 5.3 percent in domestic discretionary spending.
“If you think about the number of people who are going to take cuts, what are they going to do — maybe load up on debt,” said Dennis Moroney, former research director at CEB TowerGroup. Furloughed workers may resort to tapping their credit cards after the cuts take effect, he added.
“I think the American consumer would like to see more activity and compromise coming out of Washington,” Moroney said. The automatic cuts, put in place because a compromise for more gradual deficit reduction could not be reached, have raised fears of another spring slowdown in economic growth, which would repeat the pattern of the past two years.
On Friday, the government announced weak job creation numbers for March, increasing worries of a spring slowdown. The economy created 88,000 nonfarm jobs in March, down sharply from a revised 268,000 in February. The unemployment rate managed to edge down, to 7.6 percent from 7.7 percent, but a reduction in the number of job seekers contributed to the lower jobless rate.
“A lot of people have dropped out of the work force,” Johannes said. Analysts said the single month of results may not indicate a trend. However, the impact of the sequester is probably not to blame for the weak job creation, as furloughs are just beginning. So hiring will face even greater headwinds in the months to come.
The job report marks a reversal from February, when the labor picture and other economic measures were improving. In addition to strong February job growth, consumers saw an income gain of 1.1 percent, according to the U.S. Department of Commerce. Consumer spending during the month was up $77.2 billion, or 0.7 percent. That represented an acceleration from January, when consumer spending rose about $41 billion. “Seasonality comes into play as we get into spring,” Moroney said, and shopping for warm weather gear gets under way.
Analysts will be watching closely whether seasonal consumption, plus hiring in warm-weather industries such as construction, will outweigh the trend toward slower job creation seen in March — especially as the impact of the sequester cutbacks come into play.