Even though economic growth is expected to moderate in 2019, wage gains should boost consumers.
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Credit card balances continued rising in February, according to the Federal Reserve’s latest G19 report on consumer credit, as continued job growth has boosted consumers.
Consumer revolving debt – which is mostly based on credit card balances – rose by $3 billion on a seasonally adjusted basis to $1.06 trillion, the Federal Reserve reports. Its annualized growth rate was 3.3 percent. Total consumer debt – which includes student loans and auto loans, as well as revolving debt – was up $15.2 billion to $4.05 trillion, making for an annualized growth rate of 4.5 percent.
The average interest rate on credit card accounts was 15.09 percent in February, up from a 14.73 percent average in November, the last time interest rates were reported in the consumer debt figures. The average rate on accounts that were charged interest because they carried a balance was 16.91 percent, up from 16.86 percent in November.
See related: Fed: Card balances jumped by $2.5 billion in January
Steady job gains, wage growth in March
Consumers have had support from ongoing job growth, with the economy adding 196,000 jobs in March, according to the federal government. Wages for workers rose 3.2 percent over the year. Ian Shepherdson, chief economist at Pantheon Macroeconomics, anticipates that hiring will continue, with the pace of job growth at 175,000 to 200,000 in the second quarter.
However, Leslie Preston, senior economist at TD Economics, expects that job gains will be tempered going forward as the pace of economic growth continues to slow.
“We expect job gains to slow below 150,000 per month through the remainder of 2019. Still, this softer pace of hiring will be enough to see the unemployment rate fall a bit further below its current level, and keep wage gains healthy for workers,” she notes.
Productivity and wage gains could trigger Fed action on rates
TD Economics sees economic growth slowing from the 3 percent pace of 2018 to just above 2 percent for 2019. And Fannie Mae’s Economic Strategic and Research Group is looking to GDP growth of 1.3 percent for the first quarter as the impact from tax stimulus wears off, and consumer spending and business investment start to wane. Further, its forecast sees more risks to the downside, considering slowing global growth, and uncertainty from the U.S.-China trade talks. However, a rise in productivity bodes well.
Doug Duncan, chief economist at Fannie Mae, noted, “Some ground may have been broken on a path to improved growth, as productivity rose by 1.8 percent annually last quarter – a clear step above the well-trodden 1.0 to 1.4 percent band of the last few years.”
Pantheon’s Shepherdson sees productivity growth of about 1.5 percent as sustainable, a level that should boost wages no more than 4 percent, which would not trigger inflation. In this scenario, workers would garner a bigger share of economic growth, while profits would gradually fall. In this expansion, profits have been growing while wages have been slow to rise, making for a rise in inequality. If wages show no sign of slowing after hitting 4 percent growth, and the economy doesn’t weaken, the Fed might have to start thinking about fighting inflation with more rate hikes.
A new interest rate rise would lead to higher APRs for credit card holders. The average APR on new card accounts is nearly 18 percent, according to the CreditCards.com Weekly Credit Card Interest Rate Report.
Consumer confidence trending downward, as spending slows
For February, consumers saw their incomes rise 0.2 percent, with spending gaining 0.1 percent in January (spending estimates were delayed due to the government shutdown earlier this year).
Shepherdson sees the slowdown in spending as a sign that the trend is reverting to the pre-tax-cut pace of about 2.5 percent on a yearly basis.
“That means the numbers temporarily look terrible, but solid growth in real incomes, elevated confidence and a comfortable saving rate mean that we are not worried about the outlook,” according to him.
Even then, slowing consumer confidence is something to keep an eye on. The Conference Board reports its consumer confidence index declined in March as consumers became less optimistic about current conditions in the labor market, and the business situation. Consumer expectations for the labor market, income and business conditions had also deteriorated from February levels. The Conference Board sees this decline as arising from ongoing uncertainty in recent months as consumers have faced volatile financial markets and a government shutdown, as well as weak job growth in February.
The economic research firm notes that consumers remain optimistic about economic expansion, though slowing consumer confidence means that economic growth is likely to slow. Consumer spending accounts for about 70 percent of economic output.