Research and Statistics

Fed: Card balances grew $5.6 billion in August


Credit card balances continued to surge toward pre-recession levels in August

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Credit card balances continued to surge toward pre-recession levels in August, according to a federal report released Friday.

Consumer revolving debt – primarily credit card balances – grew $5.6 billion on a seasonally adjusted basis to $974.6 billion, according to the Federal Reserve’s G.19 consumer credit report. The annualized growth rate was 7 percent.

American credit card debt is projected to reach the $1 trillion mark in late January or early February, barring any unexpected shift by consumers away from plastic. In August, revolving debt rose to its highest level since April 2009, when it reached $981.3 billion. Cardholders have taken on $36.7 billion in new credit card debt this year.

Total consumer debt – which includes car loans, student loans and installment loans as well as credit cards – reached $3.69 trillion in August, an annualized rate of 8.5 percent.

The August increase follows a 3.4-percent bump reported in July.

The average interest rate on credit card accounts was 12.51 percent in August, according to the Fed report, slightly up from May’s 12.16 percent average, the last time interest rates were examined in the consumer debt figures. The average rate on accounts that were actually charged interest because they carried a balance was 13.76 percent, up from 13.35 percent in May.

Spending on hold
Consumers tightened the purse strings a bit in August, as data from the Commerce Department show personal expenditure was flat when compared to July. Prior to August, spending had increased every month going back to April.

Perc Pineda, senior economist at the Credit Union National Association, said the relatively cool spending numbers could be a result of a lack of product innovation in some non-auto retail categories.

“While consumer spending in services continued to stay in the positive territory in August, that was not the case for both durable and nondurable goods,” Pineda said. “If we look at August retail numbers, which decreased 0.3 percent from July, we see that sales in 10 of the 13 retail categories dropped in August.”

Pineda also said credit card loans at credit unions increased at a lower level in August (0.79 percent) than in June (1.02 percent) and July (1.08 percent). He noted that retail sales numbers were positive in June and July.

Meanwhile, personal income continued to climb, increasing by 0.2 percent to $39.3 billion. Disposable income also increased by 0.2 percent to $31.9 billion.

A rate hike to ring in the New Year?
The Federal Reserve opted not to increase the federal funds rate at its September meeting, but it sent strong signals that an increase is coming in December. Fed Chair Janet Yellen said after the meeting she expected a rate hike this year, provided there are no sudden downturns in the labor market or the global economy. The Fed is unlikely to make a move at its November meeting, which will occur just before the general election.

Michael Dolega, chief economist at TD Economics, said in a Sept. 21 research note the Fed’s positive outlook for both domestic demand and the labor market suggests it will pull the trigger in 2016.

“At this point, the Fed feels the case for a hike has strengthened and is merely waiting \u2018for the time being’ out of prudence to ensure that their outlook is corroborated by the incoming data,” Dolega wrote.

Many credit card users will be in for a shock, even with an expected 0.25-percent rate increase. A September report by TransUnion found rising interest rates would affect 92 million American consumers, and 9 million would struggle with the resulting increases in their monthly payments. Some consumers would see a $50 increase in their monthly payments under a quarter-point rate hike.

But not everyone is convinced that a December hike is inevitable. Sal Guatieri, senior economist at BMO Capital Markets, noted that soft consumer spending could validate the views of Federal Reserve board members who favor restraint – despite a near-two-year high in the core inflation rate.

“The combination of weaker spending but higher core inflation is largely a wash for the Fed, though the more dovish members will no doubt lean on the former, thus slightly reducing the odds of a December rate hike,” Guatieri said.

The September jobs report did little to sway any decision on a rate increase. The U.S. economy added 156,000 jobs in September, and unemployment rose one-tenth of a percentage point to 5 percent. Wages grew by 6 cents to $25.79, and hourly earnings have grown by 2.6 percent over the course of the year.

Pantheon Macroeconomics Chief Economist Ian Shepherdson noted that wage growth is getting closer to the 3 percent pace Federal Reserve Vice Chairman Stan Fischer has said the Fed would like to see. Additionally, the slight uptick in unemployment does not indicate a negative trend.

“This is noise, not signal,” Shepherdson said. “We see no chance of a near-term upward trend in unemployment.”

The job gains in September followed revised increases of 252,000 in July and 167,000 in August.

See related: Fed: July card balances rise 3.4 percent

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