Credit card balances increased in February as retail sales gained 0.3%. Despite continued concerns about the spread of the Omicron variant, it appears consumers were ready to shake off their covid-imposed restraints.
Consumer revolving debt, which is primarily based on credit card balances, gained $18 billion on a seasonally adjusted basis in February. It now stands at $1.063 trillion, according to the Fed. G. 19 Consumer credit file released April 7.
In February, card balances rose 20.7% on an annualized basis, following January’s revised 4% gain (previously reported as a decline) and December’s updated 4.1% rise.
Total consumer debt, which includes student and auto loans, as well as revolving debt, rose $41.9 billion to $4.482 trillion in February. This is a seasonally adjusted annualized increase of 11.3%.
Credit card interest rates also rose to 14.56% from 14.51% for the fourth quarter of 2021, the Fed reports. For consumers assessed, because they carried a balance, banks charged interest of 16.17%, compared to 16.44% in the fourth quarter.
Consumers less optimistic about access to credit
Even with the considerable growth in consumer debt, the New York Fed consumer expectations survey for February, consumers are less positive about their ability to access credit, compared to a year ago. They are also less optimistic about their ability to secure loans in the coming year than they were in the January survey.
Their average expected probability of missing a minimum debt payment over the next three months was down 0.8 percentage points to 9.2%, which is a low for the survey.
In its study of “Credit Card Late Fees”, the Consumer Financial Protection Bureau finds that credit card late fees, which are typically assessed in the absence of a minimum card payment, had risen steadily before the pandemic, peaking at $14 billion in 2019 They dropped to $12 billion in 2020 considering all of the card issuers’ pandemic relief and forbearance efforts. And they were on the rise again in 2021.
The average late fee per occurrence a consumer paid on cards from major issuers was $26 in 2019. Those who missed another payment within the next six billing cycles after a previous failure paid a average delays of $36. Those with subprime and “deep subprime” credit scores were more likely to incur repeated late payment charges, compared to those with better credit.
This meant that the average “deep subprime” account faced $138 in late fees in 2019, compared to $11 for the typical “superprime” account. Additionally, those in predominantly black neighborhoods and low-income neighborhoods have been disproportionately impacted by late fees.
The US economy continued to add jobs in March
Respondents to the New York Fed survey expect their household spending to rise 6.4% in the coming year, at the median, a new high for the survey. Respondents from all income, education and age groups were optimistic about this. This is happening even as they expect their household income to increase by only 3.2%.
They expect their revenue to grow by 3%, at the median, over the coming year. Respondents are also more optimistic on the labor market front, seeing the likelihood of a higher US unemployment rate next year at 34.4% on average.
In its March jobs report, the government reports that the economy added 431,000 jobs.
The unemployment rate fell to 3.6% from 3.8% in February, while the participation rate rose slightly to 62.4%. Even then, employment is still down 1% from its peak in February 2020.
The leisure and hospitality sector continued to gain jobs (112,000), as well as the retail sector (49,000), a sign of recovery in these two sectors which had been hit hard by the pandemic.
The average hourly wage increased by 0.4% on the month and 5.6% on the year. Job gains for January and February were also revised upwards, resulting in additional job gains of 95,000 for those two months.
The Fed is expected to hike 50 basis points in May
In online comment, Diane Swonk, chief economist at Grant Thornton, noted: “Demand for workers continued to outstrip supply in March; wages accelerated even as more people returned to the labor market. These gains, coupled with another sharp upward revision to last month’s data, underscore the strength of the labor market. These changes will reinforce the need for the Federal Reserve to focus more on fighting inflation, which will get worse before it gets better.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted in his daily email commentary that this jobless report will not lead the Federal Reserve to forego raising its target interest rate by 50 basis points in its next May meeting.
However, if the labor market “normalizes” with wage growth and labor participation not rising rapidly, the Fed “won’t have to go too far this year” with 50 basis point hikes in its subsequent meetings, Shepherdson said.
The bottom line
Consumers continue to increase their credit card balances. With the Fed determined to fight inflation and having begun raising interest rates, consumers should carefully manage their credit card portfolios. If you have a balance, plan to pay it off, as your variable interest rates are likely to rise.