Consumer credit growth slows

February 7, 2008 1:34:04 PM PST
Consumers increased their borrowing in December at the slowest pace in eight months, additional evidence that economic activity was slowing significantly at the end of last year. For all of 2007, consumer credit rose at the fastest clip in three years.The Federal Reserve reported Thursday that consumer borrowing rose at an annual rate of 2.1 percent in December, a sharp slowdown from an 8.2 percent jump in November. It was the weakest showing since credit had increased just 1.6 percent in April.

The gain was about half of what economists had been expecting. They had forecast that total credit would rise by $8 billion and instead it increased by $4.5 billion to $2.52 trillion.

The report on consumer borrowing was the latest evidence that economic activity was slowing at the end of last year as households were struggling with a prolonged slump in housing and a severe credit squeeze which has prompted banks to tighten their lending standards.

For all of 2007, consumer credit increased 5.5 percent, up from an increase of 4.5 percent in 2006. The 2007 performance was the best showing since a similar 5.5 percent rise in 2004.

Analysts attributed much of the growth in credit in 2007 to households moving to put more of their purchases on their credit cards as banks tightened up on their lending standards for home equity loans in response to the widening crisis in mortgage borrowing.

That trend was expected to persist this year with continued increases in revolving credit, the category that includes credit card debt. However, the category of credit that includes auto loans was expected to lag, reflecting carmakers' difficulties in selling new cars.

"Demand for revolving credit will remain sturdy as rising joblessness, falling house prices and slower income growth force consumers to turn to credit cards to finance consumption," said Ryan Sweet, an economist with Moody's in West Chester, Pa.

Consumer credit, as measured by the Federal Reserve, does not include any debt secured by real estate such as mortgages or home equity loans.

The December report showed that revolving credit, the category that includes credit cards, rose at an annual rate of 2.7 percent in December, a significant slowdown from a 13.7 percent jump in November.

Borrowing in the category that includes auto loans posted a 1.8 percent rise in December, down from 4.9 percent increase in November.

(Copyright 2008 by The Associated Press. All Rights Reserved.)