Credit card balances continued their upward march in April, following March’s robust gains. Retail sales for April rose 0.9 percent and it seems inflation, up 8.3 percent over the year in April, fueled higher levels of consumer spending.
Consumer revolving debt — which is mostly based on credit card balances — gained $17.8 billion on a seasonally adjusted basis in April. It’s now up to $1.103 trillion, according to the Fed’s G. 19 consumer credit report released June 7.
In April, card balances rose 19.6 percent percent on an annualized basis, following a whopping 29 percent (revised) rise in March and 11.5 percent growth in February.
Total consumer debt — which includes student and auto loans, as well as revolving debt — gained $38 billion to touch $4.566 trillion in April. That’s a 10.1 percent seasonally adjusted annualized rise.
Rising inflation may be behind recent growth in card balances
Ian Shepherdson, chief economist at Pantheon Macroeconomics, sees the uptick in credit card balances in February and March as fueled by rising gas prices (retail gas prices rose a seasonally adjusted 6.6 percent in February and 18.3 percent in March).
This meant consumers spent $13 billion more on gas in February and March than in December and January, which is equal to about half the uptick in revolving credit over this period, Shepherdson noted in daily e-mail commentary. If consumers paid for gas with their credit cards, this would have pushed up revolving credit balances at the end of the month, even though consumers paid off their card balances thereafter.
Inflation for other consumer purchases also is likely part of the story behind rising card balances. According to Shepherdson, although revolving credit still remains low compared to overall consumer income, and consumers on the whole are in good financial shape, the big picture could be masking distress among lower-income households.
Bank economists see inflation moderating
In any event, the American Bankers Association’s Economic Advisory Committee sees consumer spending continuing to grow (2.5 percent for 2022 and 1.8 percent for 2023) and fan economic growth. Low unemployment and the wealth gained in recent years will facilitate consumer spending, the ABA committee says.
The economists expect the Fed to hike interest rates another 150 basis points this year and 50 basis points in 2023. And by selling off its balance sheet holdings of securities, the Fed will push interest rates up too. They expect these actions will bring down inflation to 6.3 percent in the fourth quarter, and 2.4 percent, close to the Fed’s targeted 2 percent, in the next year.
“It looks like the Federal Reserve will successfully bring inflation down to more tolerable levels in the foreseeable future,” says Richard DeKaser, chair of the ABA’s Economic Advisory Committee. “However, there are substantial risks to this outlook.”
Economic wellbeing rose in 2021
In its report on the “economic well-being of U.S households” in 2021, the Federal Reserve finds 32 percent of adults would have struggled to meet an unexpected $400 expense, such as a car repair.
However, 68 percent of adults would have been able to pay for such an expense using cash, savings or a credit card that they paid off with their next payment due. This figure was up four percentage points from 2020, and at its highest level since the Fed survey began in 2013. This is likely due to the government’s relief efforts related to Covid, and overall economic improvement in 2021.
Fewer adults were turned down for credit in 2021, with 28 percent being denied credit or being approved for less than they wanted. This figure is down three percentage points from 2020. This led consumers to feel more confident about being approved for credit cards, with 65 percent being “very confident,” the highest level since the Fed first posed this question in 2015.
By income levels, about 50 percent of those with incomes below $50,000 were likely to have encountered credit rejections, while only 11 percent of those with incomes above $100,0000 faced negative decisions. Black and Hispanic respondents were also more likely to have encountered adverse credit decisions.
Banks eased lending standards in first quarter
The Federal Reserve’s Senior Loan Officer Opinion Survey on the lending practices of banks for April 2022 finds that in the first quarter a “moderate net share of banks” eased their lending standards for credit card loans. This meant they were more lenient about approving consumers who did not meet credit scoring standards. Also, a “significant net share of banks” saw stronger demand for credit card loans.
According to the Federal Reserve Bank of New York’s “quarterly report on household debt and credit,” credit card debt outstanding was at $840 billion at the end of the first quarter. And aggregate limits on the debt were at $4.12 trillion, up $224 billion from before the pandemic. Also, 3.78 percent of credit card debt went into serious delinquency in the first quarter, becoming 90 or more days delinquent, up from 3.04 percent in the 2021 first quarter.
Year-ahead inflation expectations dip
And the NY Fed’s survey of consumer expectations for April finds inflation expectations for the year ahead were down, at the median, to 6.3 percent, from March’s 6.6 percent. However, expectations for the three-years ahead were up to 3.9 percent.
Respondents see a 3.1 percent rise in household income, with expectations for growth in household spending up to 8 percent (a high for the survey).
On average, they expect a 10.7 percent possibility of missing a minimum debt payment in the coming three months. They also see a 36 percent average probability that the U.S. unemployment rate will be higher in the coming year.
The government reported that the economy added 390,000 jobs in May, while the unemployment rate was at 3.6 percent. Average hourly earnings rose 5.2 percent over the year, down from April’s 5.5 percent. Economists see this moderation in earnings growth as providing relief for the Fed on the inflation front.
The bottom line
Consumer spending has been ramping up, with inflation a factor, pushing up credit card balances. Banks also eased their lending standards in the first quarter, per a Fed survey. With the Fed pushing up interest rates, consumers should take advantage of opportunities to pay off credit card debt. Economists see inflation moderating in the coming year though.