Consumers Fuel Surge in Indebtedness
Consumers used their credit cards freely in January to drive up purchases on credit at more than twice December’s pace, the Federal Reserve Board said Friday.
Overall consumer installment credit swelled by $8.4 billion at an 8.4% annual rate in January, compared with a revised $3.8- billion increase in December at a 3.9% rate.
Before Friday’s report, analysts had expected an increase of $5.6 billion during January.
Credit card buying fueled the surge in indebtedness during January.
Revolving, or credit card debt, shot up by $7.9 billion in January at a 20.6% annual rate--the sharpest monthly increase in nearly 1 1/2 years since a $9.4-billion jump in September 1995.
By contrast, credit card debts in December were up by only $2 billion at a 5.2% annual rate.
The rapid growth of debts at the start of 1997 fits with other recent indications that consumers were confident enough about their job prospects to boost their purchasing.
Against a backdrop of low unemployment and high consumer confidence, “people are spending their little hearts out,” said David Wyss, an economist at DRI/McGraw-Hill in Lexington, Mass. “Credit cards are smoking.”
In the months ahead, consumer credit is likely to grow by $5 billion to $7.5 billion a month, said Kevin Flanagan, an economist at Dean Witter Reynolds in New York. “Income growth is there” to support the borrowing and payment of debt, Flanagan said in an interview before release of the report.
By category in January, revolving loans, which include credit cards, increased $7.9 billion; auto loans rose $1.3 billion and other type of installment loans decreased $700 million. The Fed’s report doesn’t track loans secured by real estate.
Economists monitor the Fed’s consumer credit statistics to help assess the health of household finances and gauge consumer spending, which accounts for two-thirds of overall economic activity in the U.S.
Earlier Friday, the Labor Department reported that the U.S. unemployment rate fell one-tenth of a point in February to 5.3% as the economy added a larger-than-expected 339,000 new jobs. Labor costs remained contained, though, and that ignited a rally on Wall Street.
For workers, of course, slow wage gains aren’t the best of news. Still, credit growth in recent months slowed from the double-digit year-over-year pace of 1995 and early 1996 as banks toughened their lending standards in response to a surge in personal bankruptcies to a record 1 million last year.
Households have also taken a more conservative approach to borrowing of late, reflecting a high level of debt to income, said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Fla.
A number of credit card issuers aggressively added customers earlier in the decade, in some cases accepting individuals with poor credit histories.
“People who normally weren’t qualified were extended credit,” Flanagan said.
The Justice Department, which administers the bankruptcy trustee system, estimates the number of bankruptcy filings will continue to rise this year and next.
