Credit Card Spending

Consumers started racking up their credit cards again in May as revolving credit increased by a whopping 11.2 percent - or $8 billion - for the largest one-month gain since 2007, according to data released by the Federal Reserve on Monday.

Overall, consumer credit grew at an annualized rate of 8% as consumers added $17.1 billion of credit in May for the largest jump in five months, and is close to levels from before the recession. Non-revolving credit, the category which includes student loans and auto loans but not mortgage or home-equity lines-of-credit, increased 6.5 percent - or $9.1 billion.

The increase was higher than economists expected.

Generally, an increase in consumer credit is a good sign because it shows that consumers are feeling good about the economy and anticipate being able to pay off those debts in the future. It could also signal that banks are more willing to extend credit - another good sign for economic growth.

The jump in overall consumer credit nearly met the $18.5 billion increase in disposable personal income in May, as reported by the Commerce Department.

But in today’s economy, it may also point to consumers using their credit cards to make ends meet because they don’t have the cash available. Recent reports show that the “recovery” is moving at a snail’s pace. And consumers are feeling it.

Consumer confidence fell in May and declined even further in June for the fourth consecutive month, the Conference Board reported several weeks ago. Only 15 percent of those surveyed said business conditions were “good” and the same percentage expected an increase in their incomes. Roughly 41 percent of respondents said that they felt “jobs were hard to get” during May and June.

The Labor Department reported last week that the unemployment rate in June remained unchanged from the previous month at 8.2 percent.

If consumers continue to manage their debts as well as they have in the past two quarters, then an increase in consumers credit may give our economy a much-needed boost. The American Bankers Association reported in its 2012 Consumer Credit Delinquency Bulletin that delinquencies fell again in the first quarter 2012 after a decline in the fourth quarter 2011. The declines included nearly all categories including credit cards and non-card revolving lines-of-credit.

ABA Chief Economist James Chessen said that the news was very encouraging and that consumers have done a "remarkable" job in taking care of their finances during these difficult economic conditions. He expects delinquency rates to further improve, but not as dramatically as in the last two quarters.

"We’ve moved back to historical norms now and further improvement could be hard to achieve. The economy has slowed recently and uncertainty remains high. This means banks will continue their prudent approach to extending new consumer credit as high unemployment levels are still creating loan losses,” Chessen said. “However, continued growth in jobs, moderating gas prices, and steady growth in personal income all will help consumers build a strong financial base.”





Sources:
Federal Reserve Board
U.S. Department of Commerce
U.S. Department of Labor
American Bankers Association
The Conference Board