Credit Cards Stage a Comeback! Time to Worry?

Revolving balances jumped 5.1% in May, the most in three years

On Friday, everyone was so consumed by the ugly unemployment numbers that another economic report went mostly unnoticed. Credit card balances in May rose at the annualized rate of 5.1%. That's the fastest they've grown in three years. Unfortunately, this is likely more bad news.

To see the significance of May's increase in credit card balances, here's some history from the Federal Reserve's data:

The only other month since September 2008 when balances rose was in December 2010, which may have been a temporary increase due to holiday shopping. As you can see, consumers quickly erased that gain the following month, paying off their card purchases.

No shopping surge occurred in May, however. But inflation was higher. We might be seeing revolving credit finally rising, not because consumers are buying more good and services, but because they're finding it necessary to rely more on their credit cards to keep up with rising prices.

For now, however, we'll have to wait to see how the Fed's data trends over the next few months. May's result is just a first estimate and will be revised a few times. Moreover, if credit card balances decline significantly in June, then we can consider this change a blip and not an indication of a new problem.

But if this is the beginning of squeezed Americans feeling they need to rely more on credit, then this is yet another troubling sign for the economy. If rising prices prevent consumers from maintaining their spending without relying on more credit, then they certainly aren't going to spend even more money that they don't have. And without their additional demand, firms will continue to feel that more aggressive hiring would be unnecessary.

Image Credit: REUTERS/Rick Wilking