Decline in Use of Credit Tied to Job Layoffs

The economic slowdown may finally be curbing Americans’ long-standing urge to borrow.

Consumers cut back on borrowing for big-ticket items such as cars and vacations in June, the Federal Reserve reported Tuesday, leading to the first decline in outstanding consumer credit in almost four years.

Total consumer credit fell by an annualized rate of 1.2%, the first such drop since November 1997. The figures, which don’t include mortgage-related borrowing, showed that credit card debt continued to rise slightly. But nonrevolving debt--consumer loans to pay for vehicles, education or vacations--dropped by an unexpectedly sharp 5.2% annual rate.

Many economists said consumers have been spooked by the rising number of layoffs.

“People are getting leery of making long-term commitments when they can’t afford to carry the payments” if they lose their jobs, said Susanne Trimbath, research economist for the Milken Institute in Santa Monica. “This is a sign that the effects of the slowing economy are starting to sink in.”

Such prudence bodes well for consumers who had been struggling under increasingly heavy debt loads, economists said, but could bode ill for the economy if less borrowing translates into less spending.

“It may be a sign that consumers are starting to pull in their horns a little bit, which is not a good sign for the economy,” said Paul Kasriel, chief economist for Northern Trust Co. in Chicago.

Consumer spending, which accounts for nearly two-thirds of U.S. economic activity, has so far remained relatively strong even as the business sector has trimmed investments in equipment and technology. The Commerce Department last month said the economy is growing at its slowest rate in eight years, thanks to sharp cutbacks in business spending.

Fed Chairman Alan Greenspan has warned that a slowdown in consumer spending could touch off a recession. The Fed has cut interest rates six times this year to encourage borrowing and boost spending.

But companies continue to ax workers, with layoffs reaching a record 205,975 in July, according to Chicago-based outplacement firm Challenger, Gray & Christmas.

The layoffs have taken their toll on consumer confidence, which has flagged as workers worry about their own financial prospects.

Still, home and auto sales remain strong, and personal incomes have continued to increase, albeit at an anemic pace.

Rather than trimming their spending, consumers could just be changing the way they borrow, some economists said. Low interest rates mean more homeowners are able to refinance their mortgages or take out home equity loans to consolidate debt payments, Kasriel said.

Consumers continued to use their credit cards, with the amount of so-called revolving credit rising at a 3.9% annualized rate. But that’s a much slower pace than April, when credit card debt was rising at a 14.2% annualized rate.

“There was concern that some of that may have been distress borrowing, with consumers dipping into their credit cards to make ends meet,” said Gary Schlossberg, an economist for Wells Capital Management in San Francisco. “We’re getting some reduction in that, which is good.”

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Peaking?

Consumer credit fell slightly in June for the first time in nearly four years, as Americans turned more cautious about taking on certain kinds of debt.

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Consumer credit outstanding, month-end data, in trillions

June: $1.590 trillion

Source: Bloomberg News