US Economy: May Consumer Borrowing Rises $11.8 Bln
Washington, July 10 (Bloomberg) -- Borrowing by U.S. consumers rose in May at the fastest pace since the beginning of the year, suggesting a slowdown in spending may be short-lived.
Consumer credit increased by a larger-than-expected $11.8 billion after rising $8.8 billion in April and $10.7 billion in March, Federal Reserve statistics showed.
The latest figures means borrowing rose at a 9.8 percent annual rate in May, almost as fast as the first quarter's 10.3 percent pace -- which coincided with the fastest pace of spending in almost 17 years.
``Even though spending slowed in April and May, perhaps this is the first harbinger that the consumer is not all spent here,'' said Chris Rupkey, senior financial economist at Bank of Tokyo- Mitsubishi Ltd. in New York. ``He has the income, the stock market has come back, he feels confident and potentially, that means that the consumer is now getting ready to rebound.''
That could also add to concerns of Fed policy-makers that six interest-rate increases since June 1999 might not be enough to keep the economy from overheating. Previously released statistics pointed to cooling demand. Retail and auto sales have fallen for two straight months. New home sales dropped in May to the lowest level in eight months.
Central bankers held the overnight bank lending rate at a nine-year high of 6.5 percent at their most recent policy session in June -- saying they are keeping a close watch for further signs the economy is slowing. Policy-makers next meet Aug. 22.
Confidence High, Unemployment Low
Personal spending accounts for about two-thirds of gross domestic product, which is why economists and Fed officials monitor signals about changes in borrowing and other indicators of consumer attitudes. Confidence in June was close to May's record high, the latest figures from the Conference Board showed. Unemployment fell in June to 4 percent -- just above the 30-yuear low of 3.9 percent reached in April -- and the Nasdaq Composite Index has risen 25 percent from its mid-May low for the year.
Revolving loans, which include credit cards, increased by $4.6 billion in May after rising $6.5 billion a month earlier. Auto and other loans rose $7.1 billion after increasing $2.3 billion.
Analysts had expected May borrowing to rise by $7.5 billion. 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.
``A lot of the strength that we've had in the last couple quarters in consumer spending was fueled by rapid growth in consumer debt,'' said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Florida. That's why analysts were expecting a smaller increase in borrowing in May. ``People are likely to pare down their debt a bit simply because they cannot afford to continue borrowing at this feverish pace,'' Brown said.
`Sign of Desperation'
It's also possible that a cooler economy -- and slower income growth -- is forcing consumers to take on more debt, some analysts said.
``This could be a sign of desperation,'' said Paul Kasriel, an economist at the Northern Trust Co. in Chicago. ``It looks like consumers may be struggling.''
U.S. banks are being more cautious going forward. Most Fed districts were experiencing either a reduction or a slowing in loan demand growth, particularly for home mortgages, the Fed reported in its last economic outlook survey released June 14. Also, ``there appears to be little change in credit standards since the last survey,'' the report said.
What's more, bank earnings could start to suffer if unpaid commercial and industrial loans as well as greater exposure to higher interest rates, according to the Federal Deposit Insurance Corp.
Business Loans
Non-current commercial and industrial loans, which are loans more than 90 days past due, increased by $1.4 billion, while another $1.3 billion was charged off as bad debt.
The non-current rate on banks' commercial and industrial loans rose to 1.28 percent, the highest level since the third quarter of 1994.
``Looking down the road, we see several yellow lights flashing `caution,''' FDIC Chairman Donna Tanoue said last month. ``Because a growing share of bank earnings is dependent on conditions -- more exposed to higher interest rates and a less robust economy -- we see bank revenues becoming more volatile.''
Still, banks' earnings rose to a record $19.5 billion in the first quarter, up 8.8 percent compared with the same period in 1999, FDIC figures showed.
The banking industry's performance this quarter compares with the $17.97 billion banks earned in the first quarter of 1999. The latest quarter's profit is $125 million greater than the previous quarterly record set in the third quarter of 1999.
Jul/10/2000 16:32 ET |
