Borrowing by Americans takes huge dive in December, largest in 11 years

Thursday, February 7th 2002, 12:00 am
By: News On 6

WASHINGTON (AP) _ Americans let their credit cards cool off in December and cut back on borrowing by the largest amount in 11 years.

The retrenchment came after a record increase in personal debt in November as zero-interest-rate financing offers spurred a big rise in auto loans.

The Federal Reserve reported Thursday that consumer credit fell by a seasonally adjusted $5.1 billion in December, or at a 3.7 percent annual rate.

The dollar decrease was the biggest since December 1990, when borrowing fell by $5.8 billion. The percentage decrease matched the rate of decline registered in October 1991.

The pullback in December reflected a big drop in demand for revolving credit, such as that used for credit cards.

Demand for revolving credit fell by a record $8.2 billion, or at an annual rate of 14.2 percent in December. That compared with an increase of $5.5 billion and a growth rate of 9.7 percent in November.

The Fed said the dollar decrease in revolving credit was the biggest since it began keeping records in 1943. The rate of decline was the steepest since a 15.7 percent rate in January 1978.

``It's understandable that consumers didn't charge up a storm in December, given the uncertain economic climate,'' said economist Richard Yamarone. ``Unemployment hit a six year high in December, and that took a toll on income growth and has forced consumers to lighten their debt burdens in order to be financially prepared to ride out the storm of recession.''

The nation's unemployment rate climbed to 5.8 percent in December but dipped to 5.6 percent in January as almost 1 million discouraged people suspended their job searches during the month.

However, demand for nonrevolving credit, including new cars and vacations, rose by $3.1 billion in December, or at an annual rate of 3.9 percent. That followed a whopping $14.6 billion increase, or a 18.5 percent growth rate, in November.

In November, total consumer borrowing rose by a record $20.1 billion, or at a 14.8 percent rate, even stronger than the Fed previously reported.

Yamarone believed that worries about job security and a volatile stock market played a role in getting consumers to trim their overall credit use in December.

The Federal Reserve cited signs of an economic rebound in its decision last week to leave short-term interest rates unchanged after cutting rates 11 times last year. Although economists believe the Fed's rate cuts will lead to a recovery in the second half of this year, economists say it will be a while longer before laid-off workers and others looking for work will see relief. The jobless rate, considered a lagging economic indicator, is expected to rise to as high as 6.5 percent by midyear and isn't expected to fall until the end of the year or beginning of next.

Against this backdrop, economists and Fed Chairman Alan Greenspan said they'll keep a close eye on the behavior of consumers, whose spending accounts for two-thirds of the nation's economic activity.

The Fed's report on consumers includes credit card debt and loans for autos, boats and mobile homes. It does not include loans backed by real estate, such as home mortgages or increasingly popular home equity loans.