Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Consumers Are Tapping Credit Cards Again
Transcript
- Lucas: So we just got the Fed's consumer credit report for May, and the headline number is pretty straightforward — total consumer credit rose by about 13 billion dollars. But the interesting part is what's inside. Revolving credit, which is mostly credit cards, jumped by nearly 9 billion. That's the biggest monthly increase since early 2023. Luna: And non-revolving credit — student loans, auto loans — only grew by about 4 billion. So the story here is really about plastic. Lucas: Exactly. And the timing matters. We've had two years of pretty strong consumer spending, partly fueled by pandemic savings that have now largely been drawn down. The personal savings rate has been hovering around 3.5 percent, which is low by historical standards. So people are increasingly turning to credit to bridge the gap between income and spending. Luna: Is this a confidence signal or a warning sign? Because on one hand, if you're willing to put dinners and travel on a card, you must feel pretty good about your ability to pay it off. On the other, the balances are piling up. Lucas: I think it's both, and that's what makes it tricky for the Fed. The unemployment rate just ticked down to 4.2 percent in June, nonfarm payrolls are still growing, and hourly earnings are up 3.7 percent year-over-year. So households have income. But the cost of living has risen a lot over the past three years, and price levels aren't coming back down — they're just rising more slowly. So real purchasing power is better than it was, but not enough to sustain the spending pace we've seen without taking on debt. Luna: And the World Cup gave bars and restaurants a temporary boost — the Fed's own Beige Book mentioned that last week. So maybe some of that credit card spending was event-driven. Lucas: Right. The Beige Book noted that consumer spending was "mixed" but that hospitality got a lift from World Cup viewership. That's a short-term sugar hit. But the underlying trend is what the Fed cares about: are households becoming overextended? Because if credit card delinquencies start rising, that could force consumers to pull back, and that's a risk to the broader economy. Luna: And we've seen early signs. The New York Fed's survey of consumer expectations showed that the share of households expecting to miss a minimum debt payment in the next three months ticked up in June. It's still low, but it's moving in the wrong direction. Lucas: That's exactly the data point that has some Fed officials nervous. The effective federal funds rate is at 3.63 percent right now, and with inflation coming in at 3.5 percent on headline CPI, real rates are positive but not hugely restrictive. If consumers start cracking under debt service costs, the Fed might feel pressure to cut more aggressively. Luna: But the jobs market is still tight. Job openings actually rose slightly in May — JOLTS came in at about 7.6 million. So employers are still hiring. That's the classic tension. Lucas: It's the central tension of mid-2026. The labor market is solid, wages are growing, but the savings buffer is gone and credit card debt is building. The key question is whether this is a normalization — people using credit as a convenience and paying it off monthly — or a sign of genuine financial stress. Luna: And the data on that is mixed. Revolving credit as a share of disposable personal income is still below its pre-pandemic peak, but it's climbing fast. If the trend continues for another six months, we'll be back to 2019 levels, which were already elevated. Lucas: Right. And that's why I think this is the most important micro trend to watch for the second half of the year. The Fed has been focused on wholesale prices and core services inflation, but consumer balance sheets might end up being the deciding factor. Luna: Honestly, if today's deep dive into consumer credit was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's a small way to keep the show ad-free and independent. Lucas: Yeah, we don't run ads, we don't pump crypto, we just talk through the data. If it helps you make sense of the economy, that's all we want. Luna: Alright, back to the numbers. So one thing that stood out to me — the increase in revolving credit was broad-based across income groups, but the lower tercile is seeing the fastest growth. Lucas: That's the worrying part. Higher-income households can absorb more debt because they have assets. Lower-income households don't have that cushion. And if they're using credit cards for necessities — groceries, gas, rent — that's a different story than using them for discretionary spending. Luna: And we have some data on that. The Census Bureau's Household Pulse Survey from June showed that about 28 percent of adults reported it was somewhat or very difficult to pay for usual household expenses. That's actually down slightly from earlier this year, but still elevated. Lucas: So the narrative is: the aggregate consumer looks fine, but beneath the surface, there's a divergence. The top half is doing well, the bottom half is stretching. And because consumer spending is two-thirds of GDP, how that plays out matters a lot. Luna: What would break the trend? A bigger drop in inflation would help because real wages would go further. Or a faster pace of rate cuts from the Fed would lower debt service costs. Lucas: But the Fed is in a tough spot. Core PCE is still at 2.8 percent, above their target. If they cut rates too soon and inflation reaccelerates, they lose credibility. If they hold steady and consumer debt becomes a problem, they might have to cut later under worse conditions. Luna: So the July FOMC meeting next week — they're expected to hold rates steady again. The market is pricing in a cut in September, but it's not a sure thing. Lucas: Right. The fed funds futures are pricing in about a 60 percent chance of a quarter-point cut in September. But that could shift quickly if the consumer credit data for June, which comes out in August, shows another big jump in revolving debt. Luna: Or if the July jobs report comes in weaker than expected. We'll get that on the first Friday of August. Lucas: Exactly. So the next few weeks are crucial. We've got FOMC next week, then the July payrolls report, then the June consumer credit data. By mid-August, we'll have a much clearer picture of whether this debt buildup is a temporary blip or a structural shift. Luna: And on that note, I think we've given listeners a lot to chew on. Next time, we'll look at what's happening with corporate bond spreads — they've been tightening even as consumer debt rises, and that divergence is interesting. Lucas: Sounds like a plan. Thanks for listening, everyone.