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Fed Credit Report Shows another Decline in Consumer Borrowing

By Faye Mergel
Published: Saturday, December 12th, 2009

American borrowing has decline for a record-setting nine straight month this October, another sign that consumers would be spending less this holiday season, making it more difficult for the economy to sustain its recovery.

Fed Credit Report Shows another Decline in Consumer BorrowingFederal Reserve’s credit report shows that consumer credit went down at an annual rate of $3.51 billion in October. Fortunately, it was not as big as the decline expected by economists, which is at $9.3 billion.
Revolving credit, which involves credit cards, fell by 9.3 percent. Meanwhile, installment credit, the category involving auto and home loans, went up at an annual rate of 2.6 percent.

Analysts say a decline in borrowing shows efforts by Americans to replenish their investments and to avoid acquiring more debts. Many are finding it difficult to borrow from banks because financial institutions have tightened their lending standards as the country is hit by the worst financial crisis since the 1930’s.

The increase in car loans show signs of recovery in auto sales in October after it went down hard in September. The decline immediately came after the surge in August, which was spurred by the Cash-for-Clunkers Program.
The smaller-than-expected decline is viewed by economists as a positive sign that consumers are likely to make big purchases such as for cars. Davis Wyss of the credit rating agency Standard & Poor’s believes that car and home purchases could greatly help the economy rebound. However, he expects an increase in consumer spending to be modest, hence Americans cannot expect a quick recovery yet.

Federal Reserve Chairman Ben Bernanke says it is too early to tell whether the economic recovery will be sustainable or not. Nonetheless, the hopes that the Fed Reserve could contribute in the recovery by holding interest rates as low as possible.

The Federal consumer credit report for the last two months reveal that decline in consumer borrowing, though prolonged, is not as bad as economists predicted. In October, consumer spending went down at an annual rate of $3.51 billion, which is a 1.7 percent fall in overall borrowing. The modest decline in October followed a huge drop in September, which is at $8.77 billion.

However, companies such as Macy’s Inc., Abercrombie & Fitch CO., Saks Inc., and Target Corp. show bigger-than-expected drop in sales this November. Retailers fear that consumer spending is likely to remain weak this holiday season.

The previous record in borrowing decline was set in 1943 and was followed in 1991. The ninth straight month decline in consumer spending is the longest that the Federal Reserve has tracked in its credit report.

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