Consumers Cut Back on Credit Cards Again in June
August 6, 2010 - 5:33 PMConsumer borrowing fell in June for a fifth straight month as households keep cutting back on credit card use.
Borrowing dropped at an annual rate of $1.3 billion in June, the Federal Reserve reported Friday. That marked the 16th drop in overall credit in the past 17 months.
Americans backed away from swiping their credit cards for the 21st straight month. That offset a rise in the number of auto loans.
Households are borrowing less and saving more, and that has dragged on the overall economy by lowering consumer spending.
The $1.3 billion June drop in borrowing was much smaller than the $5 billion decline that economists had expected. The government also revised the May decline to show a smaller drop of $5.3 billion rather than the initial $9.2 billion decrease.
While a smaller decline could signal the long slide on consumer credit is leveling off, economists cautioned against getting too optimistic given continued lackluster job growth and tight credit standards.
"As long as income and employment do not show marked improvements, consumers will avoid taking on new debt," said Gregory Daco, senior economist at IHS Global Insight. "Consumers remain bound by a weak labor market ... high debt levels and a fragile housing market."
In a separate report Friday, the Labor Department said the unemployment rate remained unchanged at 9.5 percent and private employers added only a net 71,000 jobs in July. That is far below the 200,000 or more jobs that are needed each month to make a significant dent in the jobless rate.
Overall credit dropped 0.7 percent in June. It was the smallest decline since credit increased 1.8 percent in January, the only rise since the beginning of 2009. The decrease left consumer credit at an annual rate of $2.42 trillion.
The category that includes auto loans rose 2.4 percent in June following a 1.4 percent increase in May. Analysts are predicting another increase in July after auto sales posted solid gains.
Joshua Shapiro, chief U.S. economist at MFR Inc., said consumer credit has fallen by $163 billion since hitting a peak in July 2008 as households have struggled to repair their balance sheets in the midst of a deep recession.
But he said that household net worth is down by more than $11 trillion since hitting a peak in the spring of 2007, indicating that many households probably still feel under pressure to get their borrowing under better control.
"While off to a good start, household sector deleveraging still has considerably further to go," he said in a note to clients.
The Fed's credit report covers credit card debt, auto loans and other debt not secured by real estate. It does not cover home mortgages or home equity lines of credit.
Earlier this week, the Commerce Department reported that the personal savings rate climbed to 6.4 percent of after-tax incomes in June. It was the highest reading in nearly a year and three times the 2.1 percent average for all of 2007, before the recession began.
For years, economists worried that the savings rate had fallen too low. But now the concern is that consumers aren't spending enough to help strengthen the recovery. Consumer spending accounts for 70 percent of total economic activity.
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