07/08 16:12
U.S. Economy: Consumer Debt Rose $9.5 Billion in May (Update2)
By Carlos Torres
Washington, July 8 (Bloomberg) -- U.S. consumers borrowed more in May than at any time since November as their spending is helping fuel a rebounding economy.
Borrowing through credit cards and other types of loans increased by $9.5 billion after an $8.6 billion rise in April, the Federal Reserve said.
``Consumer spending is alive and well,'' said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. ``The consumer's willingness to borrow is really the best confidence indicator of the economy.''
General Motors Corp. and other carmakers encouraged more borrowing by offering discounts to sell more vehicles in June, and that may boost borrowing in coming months. Consumer spending is important because it accounts for two-thirds of the economy.
Non-revolving loans, which include automobiles, rose $7.2 billion in May after rising $4.2 billion the prior month. Credit card and other revolving debt rose $2.4 billion in the month, following a $4.4 billion increase in April. May borrowing was the highest since a $20.4 billion surge in November.
Consumers are able to take on more debt because incomes are on the rise. Personal incomes rose 3 percent in May from the same month last year. That was the largest year-over-year increase in seven months, the latest government figures showed.
``Real wage income has been growing solidly which, along with low interest rates, has been supporting consumer sales,'' said Steven Wood, chief economist at FinancialOxygen Inc., a Walnut Creek, California, provider of financial services to banks.
Household Debt
The Fed's consumer credit report doesn't include loans secured by real estate, such as mortgages and home equity lines of credit. Mortgage debt is more than three times the amount of credit card debt, auto loans and other personal borrowing. Home mortgage debt increased to $5.87 trillion at the end of the first quarter from $5.74 trillion at the end of the fourth.
Consumer spending rose at a 3.3 percent annual pace from January to March, after rising at a 6.1 percent rate in the last three months of 2001. The fourth-quarter growth rate was the highest in 3 1/2 years. The first-quarter increase in spending helped the economy grow at a 6.1 percent annual rate, its best performance since the last three months of 1999.
Spending fell 0.1 percent in May and economic growth probably slowed to a 2.7 percent annual pace in the second quarter, according to the median forecast of economists surveyed by Bloomberg News. A pickup in demand will help the economy grow at a 3.5 percent pace to close out 2002, the survey showed.
Stocks Decline
Stocks fell as Merck & Co.'s disclosure that a unit booked $14.1 billion in revenue it didn't receive added to investors' concern that companies are improperly reporting their results. The Dow Jones Industrial Average fell 105 points to close at 9274.9. The Standard & Poor's 500 Index declined 12 points to close at 976.98.
U.S. Treasuries rose as the accounting concerns fueled demand for the safety of government debt. The 4 7/8 percent note maturing in February 2012 rose 19/32 point, pushing down the yield 8 basis points to 4.8 percent. A basis point is 0.01 percentage point.
Borrowing may keep rising. New cars and light trucks sold last month at a 16.5 million-vehicle annual rate, up 5.1 percent from May, automakers reported last week. General Motors led the industry with a 4.3 percent increase from June of last year as the world's largest automaker boosted cash incentives by as much as $750 on some pickup trucks and sport-utility vehicles.
`Solid Month'
June was ``a very solid month,'' said Paul Ballew, executive director of industry analysis at General Motors, in a conference call with investors last week. ``We continue to expect a moderate recovery and an expansion in the economy.''
The auto industry isn't the only area showing stronger sales last month. Sales at U.S. retail chains open at least a year probably rose about 5 percent in June compared with the same month last year, according to estimates by the Bank of Tokyo-Mitsubishi Ltd. That compares to a 3.4 percent gain in May and an average increase of 4.8 percent in the first four months of the year.
Because inflation remains tame, investors expect Fed policy makers to hold the target for the overnight bank lending rate at 1.75 percent, a four-decade low, at their meetings in August and September, according to federal funds futures trading. Low rates are likely to keep consumer demand from faltering and may help stimulate business spending on new equipment, economists said.
Low mortgage rates are leading to more refinancing and giving households the wherewithal to spend through lower monthly mortgage payments and cash that can be taken out because of rising home values.
Refinancing
An index measuring refinancing rose to the second-highest level of the year last week, according to data from the Mortgage Bankers Association of America. The average rate on a 30-year fixed mortgage last week was 6.47 percent, close to the 6.36 percent reached in October 1998 that was the lowest in the group's 12 years of record-keeping.
Fannie Mae, the No. 1 buyer of U.S. mortgages, recently conducted a survey on home refinancing that showed Americans pulled about $115 billion in cash out of their homes during the five quarters including all of 2001 and the first quarter of this year, said David Berson, the group's chief economist, during a conference last month.
Consumers spent $70 billion to $75 billion, more than half of it going back into homes through second-home purchases or remodeling, the survey showed. The remaining $40 billion to $45 billion was either saved or used to pay down debt, Berson said.
Still, a slow recovery in job growth may be a concern. The unemployment rate rose to 5.9 percent in June as companies hired half the number of workers expected, Labor Department figures showed Friday.
Labor Markets
``We better see the labor market recover soon, or the consumer will belly flop,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., an economic consulting firm in New York, before the report.
Concerns about jobs and terrorism caused consumer confidence to drop to the lowest level in four months in June, according to a report last month from the Conference Board, a New York-based research group.
``Consumer confidence in the U.S. on balance is consistent with the average of the 1990s,'' said Fed Governor Mark Olson in a speech in Madrid today. ``It's also consistent with what would be a reasonable growth of the economy.'' |
