The engine of this economy — the force that’s kept it ticking along in the face of tariffs and wars and climate disasters — is the U.S. consumer. And the engine that’s keeping many U.S. consumers ticking along is credit.
Back in May, consumer credit actually contracted on an annualized basis, but in June it bounced back. Data for July comes out later this week.
Between May and June, American consumers’ use of revolving credit grew 6%, comprised mostly of what we spend on credit cards.
“Consumers are putting more on their credit card to pay for you know groceries, gasoline, necessities,” said Ryan Sweet, chief global economist at Oxford Economics.
Those necessities are getting more expensive. Our wages are rising, too, though not as fast. And consumers are using credit cards to make up the difference.
So far, people generally are making payments on those debts on time.
“Nothing screams that in aggregate the consumer is under a lot of pressure. But … we know that this consumer is very bifurcated,” Sweet said.
It’s that K-shaped economy again. Higher-income households are doing well while lower ones feel really stretched.
Sweet pointed out that earlier this year, when President Donald Trump launched a war in the Middle East, tax refunds were helping a lot of people deal with the shock of higher gas prices. But those refunds are behind us.
Moving forward, people will have to increasingly rely on credit.
“So, then what happens if something else goes wrong? And if we’ve learned anything over the last decade or so, when it comes to the U.S. economy, something else is going to go wrong,” Sweet said.
Still, the increased spending on credit cards is nowhere near the growth back in 2022. St. Olaf College economics professor Ethan Struby pointed out that back then, credit card usage went up around 15%.
“We all needed lots of little treats, right?” Struby said. “And probably no surprise, that was when inflation was really high.” People had to pay more to get those treats.
Spending on credit cards has moderated since then. What happens next will, in part, hinge on what the Federal Reserve does next.
“If the Fed raises interest rates, you know, if it raises this federal funds rate target, that does tend to spill over into the credit card rates. It’s not perfect. It’s not always one for one, but they move in the same direction over time, usually,” Struby said.
And when credit card interest rates are higher, it’s more expensive to carry a balance. So some people don’t use their cards as much, according to research from the Boston Fed.
“You know, maybe they’ll instead they’ll borrow from a friend, or they’ll you know do sort of a buy now, pay later-type thing, or they’ll just spend less money,” Struby said.
That matters. Because if they spend less money, that’s less demand. And less demand slows down price growth. Of course, it also slows down the economy.