According to WalletHub’s latest credit card debt report, consumers racked up so much debt in the second quarter that the credit score firm expects outstanding credit card balances to “surpass the $1 trillion mark for the first time ever by the end of 2016.”
The researchers of the firm noted that in the second quarter alone, consumers acquired “nearly half [48 percent] of the total debt accumulated in 2015, and almost matched 2012’s $36 billion increase.”
This story first appeared in the September 14, 2016 issue of WWD. Subscribe Today.
The report said that with “13 of the last 20 quarters reflecting year-over-year regression in consumer performance, we seem to be reverting to pre-downturn bad habits.” The company added that the average indebted household’s balance “rose to $7,817 in [in the second quarter] — just $611 below the tipping point WalletHub identified as being unsustainable.”
Report author Odysseas Papadimitriou said with he global economy in flux and “debate raging over the timing of Federal Reserve rate hikes, data that speak to the financial health of the average American household can be quite telling. Credit card debt statistics, in particular, reflect consumer sentiment and can foretell over-leveraging bubbles that may trigger constriction across lending markets.”
In the apparel retail space, consumers have tightened spending over the past few years, and have shifted personal expenditures from buying items such as clothing and accessories to dining out, electronics and home goods, according to data from the government’s Bureau of Economic Analysis.
“The fact that U.S. consumers racked up a record-setting $34.4 billion in credit card debt during the second quarter of 2016 therefore represents serious cause for concern,” Papadimitriou said. “Not only was this the largest second-quarter debt build-up since at least 1986, when quarterly statistics first were logged, but it also comes on the heels of two equally foreboding financial feats, appearing to solidify a very ominous trend.”
The credit card debt report comes just as adjusted data from the Commerce Department was released showing an increase in median household income for 2015. In its Income and Poverty Report, median household income was $56,500, which is a 5.2 percent gain over 2014. Economists noted that this was the first statistically significant annual gain since the Great Recession. The poverty rate came in at 13.5 percent for 2015, which compares to 14.8 percent for 2014.
Chris Christopher, director of consumer economics at IHS Global Insight, said his firm “expects real median household income to increase in 2016 due to relatively strong employment, modest consumer price inflation, and improvement in wage gains.”
“Many middle-class families have been forced into a lower standard of living during the recession and the subsequent anemic recovery,” Christopher said. “The Great Recession was brutal to many middle- and lower-income households. The poverty rate is still relatively elevated: approximately 1 percentage point higher than the 2007 rate.”
The economist described 2015 as a “turning point on the real median household income front, as employment gains have been relatively better and consumer price inflation has been modest. We expect real median household income to surpass its 2007 level next year. It has been a long slog from the depths of the Great Recession, but things are finally starting to improve for many American households.”
What’s uncertain is if those income gains made in 2015 will be gobbled up by the credit card debt that keeps mounting. If consumers can pay down that debt load, but continue to spend, retail sales should remain stable. But whether shoppers continue to prefer spending money on experiences over buying apparel remains unclear.
WalletHub said in 2015, consumers added $71 billion in credit card debt — the largest amount since 2007. “And last quarter marked the smallest [first quarter] pay-down [$27.5 billion] since 2008,” the company said.
“As a result, it is not a question of whether consumers are weakening financially, but rather how long this trend toward pre-recession habits will last and just how bad it will get,” Papadimitriou stated in his report. “Unfortunately, the forecast for at least the rest of the year does not appear bright. WalletHub projects that we’ll end 2016 with a net increase of roughly $80 billion in credit card debt, which would bring outstanding balances above the $1 trillion mark for the first time and push the average amount owed by indebted households to a perilous $8,500.”
From a larger economic perspective, analysts are expecting the third quarter U.S. gross domestic product to show a 2.5 percent gain. Paul Ashworth, chief North American economist at Capital Economics, said in his abstract for the firm’s most GDP report, that there is “now a marked gap opening up between the incoming expenditure-based data, which point to a healthy rebound in third-quarter GDP growth and the production-based business survey evidence, which is not far above recessionary levels.”
“On balance, we still anticipate a healthy 2.5 percent annualized gain in third-quarter GDP, although we previously thought it might be 3 percent or higher,” Ashworth noted.