Americans step up credit card use sharply in May

Monday, July 16, 2012
Lindsay Heres swipes her credit card for a purchase Friday at Schnucks in Cape Girardeau. (ADAM VOGLER)

WASHINGTON -- Americans put more on their credit cards in May than in any single month since November 2007, one month before the recession began.

But overall credit card use is still well below where it was just before the downturn. Economists say May's increase was likely a temporary response to weaker hiring and poor wage growth and not a sign of sustained confidence in the economy.

"We might see additional increases in credit card debt in the coming months," said Paul Edelstein, director of consumer financial economics at IHS Global Insight. "But they won't match the May surge."

Consumer borrowing rose by $17.1 billion in May from April, the Federal Reserve said July 9. The gain drove total borrowing to a seasonally adjusted $2.57 trillion, nearly matching the all-time high reached in July 2008.

Borrowing has increased steadily over the past two years. But most of the gains have been driven by auto and student loans, which rose to a record level of $1.7 trillion in May.

Consumers cut back sharply on credit card debt during the recession and immediately after. Only in the past year have they started to put more on their credit cards and the gains have mostly been modest.

That changed in May when the measure of credit card debt jumped by $8 billion. Still, the level of debt for that category increased to only $870 billion, or 2.2 percent above the post-recession low hit in April 2011. The category had totaled more than $1 trillion before and shortly after the recession began.

And consumers reached for their credit cards more often during a tough stretch for the economy. The job market slumped. Consumer confidence fell. And wages and salaries, which have barely kept up with inflation in the past year, stayed flat.

"It is possible that households are relying more and more on credit cards to cover everyday expenses, given that job and income growth are so weak," Edelstein said.

Joel Naroff, chief economist at Naroff Economic Advisors, said that growth in consumer credit is still being held back by the weak gains in income.

"Wages and salaries have been stagnant and because of that households are reluctant to increase their debt levels at the pace they did before the Great Recession," Naroff said.

The economy created an average of just 75,000 jobs a month from April through June, down from an average of 225,000 jobs a month in the first quarter.

Consumer confidence fell in June for the fourth straight month, according to the Conference Board. The group's index is closely watched because consumer spending accounts for 70 percent of economic activity.

The overall economy grew at a lackluster pace of 1.9 percent in the January-March quarter. Many economists believe growth slowed even further in the April-June quarter. Unless job growth picks up, consumer spending could weaken and drag on economic growth.

Some economists believe the economy could get a boost in the second half from lower gas prices, which have been dropping sharply since April.

More borrowing is generally viewed as a healthy sign for the economy. It suggests consumers are gaining confidence and growing more comfortable taking on debt.

May's increase in credit card use came as a bit of a surprise to Dr. Bruce Domazlicky, director of the Center for Economic and Business Research at Southeast Missouri State University, since consumers have been somewhat cautious with their spending since the recession, he said.

"My guess is that it is not likely driven by increased confidence in the economy -- consumer confidence has been fairly flat for awhile. Consumers likely have some pent-up demands, given their restrained spending lately, and it is possible that they are using credit to fill some of their wants that they have been putting off," Domazlicky said.

Southeast Missourian Business Editor Melissa Miller contributed to this report.

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