Credit card balances surged in May as the job market and home prices both showed improvement.
Revolving debt, which is mainly made up of credit card balances, was up 9.25 percent in May, on an annualized basis, compared to April's revised 1.1 percent, the U.S. Federal Reserve said in its latest G.19 consumer credit report . The seasonally adjusted figure broke a pattern of revolving debt hovering at near-flat levels in recent months.
"We've been expecting this pickup, with the economic recovery going the way it is," said Michael Dolega, economist at TD Economics. However, the preliminary figure may be subject to revision as complete data becomes available, he added. "It was certainly more than expected."
The amount of revolving debt was $856.6 billion, compared with a revised $849.9 billion in April.That marked the greatest increase since May of 2012 and broke a pattern of cards lagging behind increases in other forms of consumer debt.
The Fed's broader figure for consumer debt, which adds car loans and student loans to the revolving debt total, was $2.8 trillion, up an annualized 8.3 percent for the month.
The continued improvement in the economic pillars of employment and housing has strengthened the environment for consumer credit, said Martin Schwerdtfeger, senior economist with TD Economics.
"The improvement in jobs goes to strengthening credit ratings for consumers," he said, besides giving them confidence that they'll be able to pay off debts they take on. Banks' reluctance to extend credit has played a part in the slow growth of card balances since the 2009 recession.
Auto, student loans rise
During the year so far, student loans and car loans had responded more strongly to the improving economy than credit card borrowing. Nonrevolving consumer debt rose at an annualized rate of 7.9 percent in May, on top of 6.2 percent in April and 7.8 percent in the first quarter.
Changes in total card balances reflect charge-offs by card issuers as well as consumers shrinking or growing their balances. In the first quarter of 2013, banks charged off 3.83 percent of card balances , Federal Reserve figures show.
The Fed has signaled that short-term rates -- to which cards are pegged -- will be stable until about mid-2015, when it expects to gradually begin lifting rates again for the first time since the financial crisis in 2008. Improvement in the jobless rate will be a key factor in deciding when to begin the increases.
The job market is continuing its gradual recovery, with 195,000 jobs added in June, on top of a boost of 195,000 jobs in May, the Labor Department said July 5. Unemployment remained at 7.6 percent, about 1 percentage point above the level where the Fed expects to consider raising short-term interest rates .
During May, consumers had a bit more money to spend, as personal income increased 0.5 percent, the Bureau of Economic Analysis reported. Consumer spending rose 0.3 percent, rebounding from a dip of the same size in April.
Housing prices continued their climb in May, as sales reached their highest level since November 2009, the National Association of Realtors said. The median existing-home price of $208,000 in May was up about 15 percent from year-ago levels. Even though home prices don't affect consumers' income, rising values can help put people in a free-spending mood as their net worths rise, Schwerdtfeger of TD Economics noted.
"The recent performance of the labor market is not stellar, but there is sustained improvement in labor conditions," he said. "Also a significant factor is the improvement in housing prices, because of the wealth effect."
Strength in both the job market and housing climate "tells a story of improving outlook going forward -- that is mostly what drives people's decisions to go out and seek credit."See related: Fed: Card balances ticked up in April
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