Credit card debt is edging
into record territory but not because of consumer confidence
By Danielle DiMartino Booth
Are US Federal Reserve stress
tests leading economic indicators? That certainly seems to be the case.
Just ask Capital One Financial
Corp.
As of the first quarter,
credit card loss provisions at Capital One were above 5 per cent, a six-year
high. The company recorded some improvement for the second quarter, yet Fed
stress tests of the bank’s overall loan portfolio in a deep downturn show
losses topping 12 per cent.
That explains Capital One’s
“conditional” passing score, a black eye that prompted a reduced share buy-back
plan and no increase in its dividend.
Most economists today applaud
the resilience of the current recovery, which has stretched into its eighth
year, the third-longest in postwar history. Resilience and rising household
defaults, though, don’t tend to go hand in hand.
Pressures have been building
in the background for some time. When adjusted for inflation, credit card usage
has grown faster than incomes for 18 months. According to Fed data, that time
frame coincides with the upturn in revolving credit, a proxy for credit card
debt.
In November 2015, outstanding
revolving credit crossed above the $900-billion threshold for the first time
since December 2009. By May of this year, annual growth was clocking 8.7 per
cent.
Meanwhile, credit card
balances hit $1.02 trillion, the highest level in almost eight years.
Whether by choice or force,
the aftermath of the financial crisis prompted households to ratchet back their
usage of credit cards. As the recovery got underway, frugality prevailed,
punctuated by an increase in debit card purchases.
It is thus notable that Bank
of America data find debit card usage has weakened in recent years as
households grew more comfortable rebuilding their credit card balances.
“Confidence” is the term most
associated with the rising credit card debt. But it’s fair to ask why confident
households would choose to pay so dearly for the privilege. At 15.83 per cent,
the average rate on credit card balances is at a record high.
It is more likely that
households are increasingly tapping their credit cards to cover the cost of
necessities, that they are less confident and more anxious about their future
finances.
The latest University of
Michigan consumer confidence data suggest anxiety is indeed setting in. At
80.2, the expectations component is at the lowest since October and running
below the 2016 average of 81.8.
According to the University of
Michigan: “The data indicate that hopes for a prolonged period of 3 per cent
GDP growth sparked by Trump’s victory have largely vanished, aside from a
temporary snap back expected in Q2. The declines recorded are now consistent
with just above 2 per cent GDP growth in 2017.”
The US retail sales report for
June corroborates the forecast for continued muted economic growth. In
constructing gross domestic product, statisticians net out auto, gasoline and
building materials purchases from retail sales to arrive at a “control group”.
At 2.4 per cent, the annual
growth rate of the control group has fallen to the lowest since January 2014.
The renewed weakness in
consumption prompted the economists at Bank of America Merrill Lynch to reduce
their forecast for second-quarter GDP to 1.9 per cent. The Atlanta Fed’s GDPNow
forecast is a bit higher, at 2.4 per cent, but that’s a far cry from the robust
4.3 per cent rate anticipated on May 1.
In her recent congressional
testimony, Fed Chair Janet Yellen expressed continued optimism for a strong
second-quarter rebound in GDP growth. If the Atlanta Fed’s forecast pans out,
first-half growth will stumble in at a 1.9 per cent rate, hardly reflective of
accelerating economic activity.
Even the ebullient home
builders have begun to concede that there could be more than just a supply
shortage at the root of the slowing housing market. Pending home sales have
fallen for three straight months and are now 1.7 per cent below their year-ago
level.
The National Association of
Realtors acknowledged that “weaker financial and economic confidence could also
be playing a role in the slowdown in contract activity.” The NAR added that
they had “found that fewer renters think it’s a good time to buy a home, and
respondents overall are less confident about the economy and their financial
situation than earlier this year.”
With rental inflation running
3.9 per cent above its year ago rate and homes priced out of their budgets,
renters are effectively trapped in a budgetary vice. Housing costs consume
about a third of households’ average budgets and largely dictate consumers’
wherewithal to finance the discretionary purchases that make the
consumption-driven US economy hum.
Suffice it to say, when the
costs of other necessities such as health care, the food you put on the table,
your car payment and mobile-phone bills are also running high, it’s difficult
to make ends meet. In a survey conducted by Survata and released in late June,
49 per cent of households said they were living paycheck-to-paycheck; six in 10
reported that their rainy-day funds could not cover six months of living
expenses.
What’s a household to do under
such circumstances? It would appear they’ve had to rely on credit cards. The
eventual price tag for the economy remains to be seen and won’t be known until
the next recession has come and gone.
As for how high the bill will
be in the end, its likely Capital One already has that answer.
— Bloomberg
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