Credit Card Debt Soars in May

The initial reports on the Fed's release of consumer credit data for May focused on the slow 2.4 percent annual rate of growth reported for the month. This reporting misses the boat.

There are two major components to consumer credit. The non-revolving component is primarily car loans. This component fell at a 2.0 percent annual rate, reflecting weak car sales.

The other component is revolving credit. This is primarily credit card debt. This component rose at 9.9 percent annual rate in May. This is a sharp acceleration from earlier this year, when revolving debt was actually declining.

It is always possible that a single month's data is simply an aberation and will be reversed next month. But if this proves to be the beginning of a trend, then the story goes like this: home prices have stopped rising and may even be declining in some places. This means that people can no longer sustain their consumption with by withdrawing equity from their homes. Therefore, many people are turning to credit card borrowing as a way to sustain their consumption and in some cases to make their mortgage payments. (Many adjustable rate mortgages taken out in 2003 are being reset at much higher rates now.) If this story is true, then the May report on consumer debt is a sign of growing stress in consumer finances.

--Dean Baker

You need to be logged in to comment.
(If there's one thing we know about comment trolls, it's that they're lazy)

Connect
, after login or registration your account will be connected.
Advertisement