Fed: Revolving debt surges in June
Consumer revolving debt – which is chiefly credit card debt – rose in June for the fifth straight month, according to a federal report Friday.
Revolving debt surged $7.7 billion on a seasonally adjusted basis to $960.8 billion. The annualized growth rate was 9.7 percent, according to the Federal Reserve's G.19 consumer credit report.
"Credit card debt is still relatively low – there's more room to grow," said Diane Swonk, president of DS Economics in Chicago.
Total short-term consumer debt, including auto loans, education loans and installment loans as well as cards, grew 4.1 percent annualized in June.
The June G.19 report also included a look at student loan debt, which was up $7.5 billion in the second quarter, to $1.36 trillion. Car loans were up $21.7 billion in the quarter, to $1.07 trillion.
The growth in balances came during a period of strong consumer demand for cards, while banks are increasingly willing to lend on plastic. Applications for cards reached a record in June, a federal survey found. And banks continue to gradually grow more liberal with new credit card accounts and, to a lesser extent, with credit limits, a Fed survey of senior loan officers found.
For the first-half of 2016 consumer revolving debt is up by $10.5 billion. However, balances remain below their pre-recession peak of $1.02 trillion in April 2008.
Rosy employment backdrop
A glowing job market is giving consumers more resources – and confidence – to loosen the reins on credit card spending. Friday's widely watched jobs report from the U.S. Labor Department surprised analysts with robust growth of 255,000 jobs in July, on top of an upwardly revised 292,000 in June. The unemployment rate remained at 4.9 percent, as more workers entered the job market to take the available openings.
"Consumers are clearly leading growth, belying the weakness recorded elsewhere in the economy," TD Economics Senior Economist James Marple wrote in a recent research note. Consumers increased their spending 0.4 percent in June, outpacing growth in their incomes. But spending by business has not kept pace with consumers, making total economic growth less robust. The economy grew at an annual pace of 1.2 percent in the second quarter, weaker than economists expected.
On the downside for card users, the strong job market raises the odds of interest rate hikes, which will make it more expensive to carry balances. The Fed has held rates steady since a quarter-point hike in December 2015. Healthy job growth provides more leeway to hike again, perhaps in September or December, without causing economic growth to stall, economists say.
"The Fed will be patient, but will not ignore signs of progress in the labor market," Marple wrote.
A quarter-point hike in the federal funds rate – the government's lever on short-term interest rates – will hit credit card users in the wallet almost immediately, as card issuers raise their rates in step with the federal rate. But other, longer-term forms of debt feel little or no effect of the move, easing the impact. In the mortgage market, for example, "the quarter-point is kind of irrelevant," Swonk said.
Outlook for cards
With card balances climbing and new cards being handed out at record rates, are consumers in danger of getting over their head with high-cost card debt?
Growth in the number of cards during the year's first quarter propelled the total number of accounts to 337 million, according to the American Bankers Association. That's inching closer to the pre-recession level of 344 million recorded in the first quarter of 2008.
But when you consider the growth in consumer budgets, card debt remains manageable, the bankers' group said. Card balances represent about 5 percent of consumers' available income, which is in line with the low levels of debt burden recorded in the post-recession period.
“While more consumers are using credit cards for short-term financing, the amount of credit card debt they are carrying relative to their disposable income is quite low by historical standards,” Jess Sharp, head of ABA's Card Policy Council, said in a statement.
See related: Fed: May card balances rise 3 percent
- Powell: Fed remains patient in setting rates – The Federal Reserve will remain patient in assessing the need for rate hikes this year, according to Fed Chairman Jerome Powell ...
- Credit freezes are now free ? but do you need one? – Credit freezes, which keep lenders and other companies from viewing your credit, are now free. We compared them to other credit protection tools, including locks and monitoring services. Here's how to use them all to protect yourself ...
- Employer credit checks: Who does them, how they work and what laws apply – If you're applying for a new job, a credit check could determine your fate, depending on the position and where it's based. Here's how they work and what to expect ...