As recession, layoffs continue, consumers ditch debt
By Jeremy M. Simon
Credit cards remained little-used in April, based on the latest data from the Federal Reserve, sending revolving debt levels sharply lower.
| Consumer credit card balances plunge again in April |
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The Fed's monthly G.19 report on consumer credit, released Friday, showed that the second quarter picked up where the first left off. According to the report, revolving credit -- a loan category comprised almost entirely of credit card debt -- fell at an annualized rate of 11.0 percent in April, coming on the heels of a 11.2 percent fall in March. Overall, revolving debt fell to $931.0 billion from a total of $939.6 billion in March.
Additionally, February's revised 13.94 percent decline in revolving debt is the largest since the 15.72 percent fall in January 1978.
The seven consecutive monthly declines in revolving credit from October 2008 to April 2009 represent the longest pullback on record since the report began in January 1968, according to the Fed.
Meanwhile, nonrevolving credit fell 5.3 percent in April to $1.593 trillion. That section of the consumer credit report includes a variety of types of lending, primarily auto loans, student loans and loans for mobile homes, boats and trailers.
Taken as a whole, consumer debt totaled $2.524 trillion in April, compared with $2.540 trillion in March.
Consumers hesitant to use plastic, experts say
According to experts, card balances are declining as consumers remain hesitant to make additional charges and card issuers assist by cutting available credit. "The trend is certainly toward having less revolving consumer credit outstanding," says Cynthia Ullrich, senior director at Fitch Ratings in New York.
"I believe that consumers are spending less on their credit cards," Ullrich says.
Recent data support that stance. Despite personal incomes that got a boost from government stimulus and tax breaks, personal consumption dipped 0.1 percent in April. That combination of greater incomes and lower expenditures lifted the savings rate to a 14-year high of 5.7 percent in April, up from 4.5 percent in March. Analysts say that has prompted a drop in the consumer credit numbers. "The household sector has been deleveraging pretty aggressively and the savings rate has been rising," says Joseph Lupton, senior economist with JP Morgan Chase.
| We have not seen an increase in the monthly payment rate which would indicate that people are paying off their credit card debt faster than they have in the past. |
| -- Cynthia Ullrich Fitch Ratings |
Even as consumers put money into savings, the ongoing decline in revolving credit appears to stem primarily from a pullback in card use rather than aggressive effort to pay down balances. "We have not seen an increase in the monthly payment rate, which would indicate that people are paying off their credit card debt faster than they have in the past," says Ullrich.
Cardholders will likely continue to make fewer charges relative to their earnings. Lupton predicts further declines in the ratio of card expenditures to consumer incomes. He explains that outstanding consumer credit (revolving and nonrevolving) as a share of personal disposable income peaked at around 25 percent during 2003, but has since trended back down to 23.6 percent as of March. That ratio could narrow further. "It wouldn't be surprising to see it move down to something like 20 percent, which is more on par with what we saw last decade, in the '90s," he says. According to Lupton, that would suggest an additional 10 percent decline from March's total of $2.55 trillion in total consumer credit, marking by far the largest decline in the post-World War II era.
Card use curtailed as job losses, energy prices head higher
Meanwhile, rising unemployment and gas prices could spell further reductions in card use. The May employment report, released today, showed that even as job losses slowed last month, the unemployment rate advanced to 9.4 percent, setting a new 25-year high.
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| (A) number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions. |
| -- Ben Bernanke Federal Reserve chairman |
Bernanke also sounded a cautious note on the employment sector, as "businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes." Although rising unemployment could force some households to increasingly rely on plastic to cover expenses, experts say that any uptick in revolving credit should be offset by the build up of precautionary savings -- leading to a net decrease in revolving credit. "You've already seen consumer credit move down and this is in an environment where the shocks have been enormous," Lupton says.
Additionally, rising energy prices could also limit spending on credit cards. Gains over the past several months in the price of crude oil have meant higher prices at the pump. As consumers spend more to fill up their vehicles, they have less cash to spend on other purchases. "The next few months, you're going to start to see household spending impacted by this hit to their purchasing power," Lupton says. Still, the effect of higher gas prices may be somewhat offset by fiscal stimulus, which would enable consumers to increasingly deleverage -- scale back their debt. "How that plays out is going to be an open question. Our hope is to see consumer spending stabilize over the summer," Lupton says.
Lower card balances could lead to pop in charge-offs
Regardless of consumer spending, banks will likely feel further losses. The latest data from Fitch Ratings' credit card index showed credit card delinquencies fell month-over-month in May for the first time this year, although charge-offs reached a new record high. "We're hopeful that it's a trend that delinquencies are abating and that we'll see lower charge-offs in the future," says Fitch's Ullrich. Late payments, recorded as delinquencies, become charge-offs when banks decide the outstanding debt is not collectible.
Despite hopes for an improved picture, charge-offs could actually increase further as revolving balances come down. As cardholders avoid adding to outstanding credit card balances, the percentage of charge-offs could rise in coming months. "You still have the same dollar amount of charge-offs, but compared to the amount outstanding, it looks worse," Ullrich says.
