Consumer Debt Takes a Surprise Jump in October, But Credit Card Use Falls

Consumer Debt Takes a Surprise Jump in October, But Credit Card Use FallsU.S. consumers appear to be shedding their frugal habits a bit: The amount of consumer credit in use unexpectedly rose in October, with total consumer debt rising by $3.4 billion or at 1.7% annualized rate to $2.399 trillion, the Federal Reserve announced Tuesday. It was the second straight monthly increase in total consumer debt.

The consensus of economists surveyed by Bloomberg had been that total consumer debt would fall by $2 billion in October, after a revised $1.3 billion rise in September, less than the initially estimated $2.1 billion rise. Total consumer debt fell by $4.9 billion in August.

In the past 12 months, total consumer debt has fallen 3.1% to $2.399 trillion from $2.475 trillion in October 2009. That's slightly higher than the 2.9% year-over-year rate of decline recorded in September.

As in September, the entire rise in consumer debt in October occurred in non-revolving debt, which includes most auto loans, personal loans, and student loans, which increased by $9 billion, or at a 6.8% annualized rate, to $1.599 trillion. Meanwhile, revolving debt, which includes most credit cards, plunged by $5.6 billion, or at an 8.4% annualized rate, to $800.5 billion.

A perfect storm of factors coalesced during the 2007-2009 recession to produce steadily declining consumer credit balances. Stagnant incomes in many job segments, the loss of more than 8 million jobs from the workforce, reduced credit lines, and higher interests rates by banks and card issuers all prompted Americans to pay down debt over the past two years.

Most economists view the declining balances as a positive development for the long term, as Americans over-consumed during the decade before the recession, resulting in high and in many cases unsustainable credit card balances.

In the short term, however, the great credit card pay-down is hindering GDP growth by constraining consumer spending, which historically has accounted for 65% to 70% of U.S. GDP.

October Report: Out of Date Already?

The decline in credit card use in October was a setback for the nation's retailers, who are hoping that the nation will not experience another frugal holiday shopping season.

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However, economists and retail analysts caution that the jury is still out regarding holiday season retail sales: The consumer credit report lags current conditions, while recently released November retail sales data indicated a 6% increase in sales for the month, well above the 3% to 4% growth most analysts had forecast.

Given that, it's entirely possible that credit card use picked up in November after October's decline. If it did, and the pattern continues in December, that would gladden the hearts of the nation's retailers, who are hoping that greater use of credit would help build upon November's retail sales momentum to generate a decent holiday sales season -- and a boost in GDP growth.
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