Consumer credit card balances tumbled in June after shooting up
the previous month, according to new data from the Federal
Reserve.
The Federal Reserve's latest monthly G.19 consumer credit
report, released Tuesday, showed a 5.1 percent drop in revolving
debt as more people shied away from charging their purchases to
credit. Revolving debt, which in the report is made up almost
entirely of credit card debt, dropped by $3.7 billion in June to
$864.6 billion.
June's drop in revolving debt marks the third time this year
that consumers have trimmed their credit card balances, and
economists say that rising economic uncertainty deserves much of
the blame.
"People are just not sure what the future is going to bring and
so consumers are being very careful," says Michael Davis, a
professor of economics at the Cox School of Business at Southern
Methodist University. "They're trying to deleverage and they're
trying to get ahold of their finances, which is probably a good
thing."
The Fed's G.19 consumer credit report also looks at nonrevolving
debt, which includes auto loans, student loans and loans for mobile
homes, boats and trailers. Nonrevolving debt went up 7.2 percent to
$1.7 trillion in June. Because the nonrevolving debt was larger
than revolving debt's decrease, overall consumer credit increased,
by $6.5 billion. That rise of 3 percent in June brought total
consumer credit to $2.6 trillion.
Consumers face an uncertain economy
Consumers' unwillingness to overspend isn't surprising, say
experts, particularly since they are facing significant economic
headwinds.
The U.S. economy added 163,000 jobs in July -- a marked increase
from the previous two months when it added just 64,000 jobs in June
(revised downward from 80,000) and 87,000 jobs in May. However,
that wasn't enough to make much of a dent in the number of people
who are still searching for work, says the Labor Department. In
fact, according to the most recent jobs report, the unemployment
rate actually ticked up slightly last month to 8.3 percent.
Consumers also aren't spending as much as economists hoped on
goods and services and that, too, is discouraging businesses from
hiring, say experts. Consumer spending was flat in June, according
to the Commerce Department, despite slightly higher incomes for
some consumers, and retail spending fell for the third straight
month, according to the National Retail Federation. As a result,
many businesses are waiting for a more dependable customer base
before they start to expand.
"A lot of businesses are saying, 'When is demand going to come
back? When is the market going to really show up? When are we
really going to get a rebound in construction?," asks Cox School of
Business's Michael Davis. "And nobody is really able to answer that
question, and so we're just kind of bumping along here."
The likelihood that more jobs will come roaring back in the near
future is also poor, say economists. The Conference Board's
Employment Trends Index -- which measures the probability that the
number of jobs will grow -- increased slightly in July after
falling the previous month. However, economists are pessimistic
that consumers' rosier jobs prospects will last.
"The Employment Trends Index increased slightly in July, but is
still below the May level, and is only slightly above the February
level, suggesting that slow employment growth is likely to continue
in the next few months," said Gad Levanon, director of
macroeconomic research at The Conference Board in a statement.
"There is no reason to expect employers to rapidly expand their
workforce in the current economic environment, and the July pace of
job growth (163,000) is unlikely to be sustained."
That negative economic forecast will likely weigh on consumers
in the future, say experts, and continue to tamp down spending as
they realize that their ability to bounce back from a potential job
loss is far from guaranteed.
"When you've got those kinds of uncertainties, if you're
thinking rationally, you're going to try to play it very close to
the vest," says Jim Roberts, a professor of marketing and an expert
in consumer spending at Baylor University. "You're going to save
money and you're going to be very reluctant to give up what might
be your last paycheck."
That, in turn, could hurt economic growth even further, say
experts, since the economy depends on consumers' willingness to
make big purchases. "If we have some financial stability, we're
much more likely to buy that refrigerator or car or even go out to
dinner," says Roberts. However, if we're feeling anxious about our
ability to pay our bills, then we're much more likely to stay home
and leave our credit cards in our wallet. "Even small purchases may
be impacted by consumer uncertainty," he adds.
That said, if the economy defies economists' pessimistic
predictions and bounces back more rapidly, consumers are likely to
respond by resuming charging to their cards, says Roberts.
He points to past economic downturns as an example. "When the
financial storm clouds [appeared], our savings went up, our credit
card spending went down," says Roberts. "However, as soon as the
clouds started to lift, we stopped saving [and] our credit card
debts went up. Once we think we're out of the woods, so to speak,
we go back to our profligate ways."
"The only difference here is that we haven't really left the
woods," adds Roberts.