US Economy: Consumer Debt Surges Again in December
Washington, Feb. 7 (Bloomberg) -- U.S. consumer debt surged in December for the second straight month to fuel holiday spending and cap a year that showed the fastest pace of borrowing since 1996, Federal Reserve figures showed.
Consumer credit rose by $11.2 billion in December to $1.4 trillion after a November gain of $15.8 billion that was the largest in four years. Borrowing for all of 1999 grew by 7.6 percent. That followed a 5.4 percent increase in 1998 and is the largest since debt climbed 7.9 percent three years earlier.
Consumers have supplied the momentum for an economic expansion that became its longest ever this month. Higher credit costs nonetheless could temper a spending mood that has been encouraged by record confidence, stock market gains, and the lowest unemployment in 30 years, analysts said.
Americans are ''bent on spending the windfall'' from economic growth, said Vincent Boberski, senior economist with Dain Rauscher Inc. in Minneapolis. Although consumption should start to fall this year, ''we have to keep in mind that underlying demand continues to be extremely strong.''
The expansion, in its 107th month, has handed the government the means to reduce its debt, freeing money for consumers to borrow. President Bill Clinton today sent Congress a $1.84 trillion budget for the fiscal year beginning Oct. 1 that projects $171 billion in debt reduction next year and elimination of publicly traded government debt by 2013.
Analysts had expected consumer borrowing to rise $8.3 billion in December after a previously reported gain of $15.6 billion in November.
Revolving loans, which include credit cards, increased $4.1 billion after rising $4.4 billion in November. Auto and other loans grew by $7 billion after gaining $11.4 billion in November.
Consumer borrowing rose at an annual rate of 9.7 percent in December compared with a 13.8 percent annual pace during November, according to the Fed.
Spending High in December
Bonds and notes fell and stocks were mixed. The 10-year note dropped more 21/32, pushing its yield up 10 basis points to 6.65 percent, on concern the Fed will raise interest rates again next month. The Fed last week boosted the overnight bank lending rate by a quarter point to 5.75 percent, the fourth increase since June 30, and said the economy is at risk of overheating.
The Dow Jones Industrial average fell 46 points, or 0.4 percent, while the Nasdaq Composite Index rose 71 points, or 1.7 percent, on its way to a record close.
Spending typically rises in the Christmas holiday season, and this past December was better than most. Retailers reported their best Christmas sales in seven years. Consumer spending rose in December at its fastest pace in four months, climbing 0.8 percent. Spending for the year grew 6.9 percent -- the largest increase in a decade, Commerce Department figures showed Jan. 31. Auto sales for all of last year set a record of almost 17 million vehicles.
The Clinton Budget
The government, meantime, is on track for a third consecutive annual budget surplus, and Clinton's budget expects the economy will grow by 2.6 percent in 2001, down from 2.9 percent this year, and more than 4 percent in each of the three prior years.
Still, continued growth will hold down costs for social programs and boost revenue further, helping keep the federal government's books balanced. The Treasury reported the largest budget surplus in history -- $123 billion -- in fiscal year 1999, which ended last Sept. 30. That followed a $69 billion surplus a year earlier, the first back-to-back government surpluses since 1956-57. For fiscal years 2000 and 2001, the Clinton administration forecasts surpluses of $167 billion and $184 billion.
''We've gone from a $300 billion deficit to a $200 billion surplus,'' said David Wyss, chief financial economist at Standard & Poor's DRI in Lexington, Massachusetts. ''That's $500 billion extra for the rest of us to borrow.''
The Budget Impact
The government's improved finances have helped hold down borrowing costs for consumers, Wyss said. The average fixed interest rate on credit card balances was 15.4 percent in December, down from more than 17 percent in 1996, according to Bloomberg analytics.
Separately a private report indicated demand for labor remains strong. U.S. businesses in January announced plans to cut 50,655 jobs, down 36 percent from a year earlier, according to Challenger, Gray and Christmas, an employment firm. It was the fifth consecutive month that cuts were below year-earlier levels. Last week, the Labor Department reported that January unemployment had fallen to a 30-year low of 4 percent.
The pace of consumer borrowing has begun to raise some concern among Clinton and others. Consumer spending rose faster than incomes last year, and the savings rate fell to a record low 2.4 percent from 3.7 percent in 1998, Commerce Department figures showed. December's saving rate also was a record low, falling to 1.5 percent from 2 percent during November.
With an economy that has grown at 4 percent or higher in the last three years, other evidence is needed before the worries can be justified, analysts said.
''There was so much cash sloshing around last year,'' said Christopher Low, chief economist at First Tennessee Capital Markets in New York. ''For now, there is no problem.'' However, if borrowing keeps growing at a rapid pace, ''that will quickly change,'' Low said.
Lenders Benefit
Debt-to-income ratios have been at a manageable 17 percent or so over the past two years, said another analyst, economist Dana Saporta at Stone & McCarthy Research Associates in Princeton, New Jersey. And ''that doesn't take capital gains -- -- whether realized or unrealized -- from stock holdings. I don't think there is much evidence to date that consumers are taking on too much debt.''
Spending has been a boon to lenders. American Express Co. reported fourth-quarter profit rose 14 percent on higher credit and charge card revenue and mutual fund fees. The New York-based travel services and financial adviser also issued 1.2 million more cards from the third quarter, fueled by demand for its new blue card that offers zero percent interest for the first six months.
Economists watch the Fed's report to help them gauge credit card use and consumer demand. The statistics don't track loans secured by real estate, omitting home equity loans, which have grown in popularity over the past decade. |
