AP News

Ahead of the Bell: US consumer credit

WASHINGTON (AP) — Americans likely borrowed more in May, especially to buy new cars and take out school loans.

Economists were predicting that consumers increased their borrowing by $13 billion in May, according to a survey by FactSet. The Federal Reserve will release the report at 3 p.m. EDT Monday.

In April, consumer borrowing rose $11.1 billion compared with March. That increase pushed borrowing to a seasonally adjusted $2.82 trillion. That was another record level and marked the 20th straight monthly gain.

Nearly all of the April gain came from the category that includes auto and student loans, which increased $10.4 billion to $1.97 trillion.

A measure of credit card debt rose $682 million to $850 billion in April. While that's only a modest gain, it follows a decline of $906 million for the category in March.

The credit report doesn't separate auto loans from student loans. But according to quarterly data compiled by the Federal Reserve Bank of New York, student loan debt has been the biggest driver of borrowing since the Great Recession ended in June 2009. Student loans reached $986 billion in the first three months of this year. That's up from $675 billion in the second quarter of 2009.

Greater credit card borrowing could help boost consumer spending, which accounts for 70 percent of economic activity. But consumers have been hesitant to run up high-interest debt since the recession. And the concern is that they will remain cautious because higher Social Security taxes this year have reduced most paychecks.

The measure of card debt in the Fed's report has risen by $4 billion this year but that gain compares to annual gains of $25 billion to $50 billion in credit card debt before the Great Recession of 2007-2009.

The total level of credit card debt in April was still nearly 17 percent lower than the all-time high of $1.02 trillion reached in July 2008.

Rising home prices and steady job growth have helped offset some of the impact of the January increase in Social Security taxes.

Employers added 195,000 jobs in June and more in April and May than previously thought, the government reported Friday. Pay was also up sharply last month with average hourly pay rising 10 cents in June to $24.01. Over the past 12 months, pay has risen 2.2 percent while consumer prices have increased 1.4 percent during the same period.

Consumers increased their spending from January through March but they had to trim the pace of their savings to finance their purchases. After-tax income dropped in the first quarter, a decline that reflected in part the increase in Social Security taxes that took effect on Jan. 1.

A person earning $50,000 a year will have about $1,000 less to spend this year. A household with two highly paid workers will have up to $4,500 less.

The overall economy grew at an annual rate of 1.8 percent in the January-March quarter, a downward revision from a previous estimate that the economy was growing at a 2.4 percent rate in the first quarter.

Many economists have forecast that growth in the April-June quarter will weaken further to around 1.5 percent. But they are hopeful that the economy will rebound somewhat in the second half of this year as stronger employment growth fuels increased consumer spending.

The Federal Reserve's borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

Steve Ballmer, Power Forward
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