Consumers Borrow More for New Cars, Student Loans

Consumer credit unexpectedly rose by $2.1 billion in September, at an annualized rate of 1.1%, to $2.412 trillion, the U.S. Federal Reserve announced Friday. But the rise was only a partial victory for those who argue that credit expansion is required for the economy to get back on track as credit card debt fell for the second straight month.

A Bloomberg survey had expected consumer credit or total consumer debt to fall by $3.0 billion in September, after a revised $4.9 billion decline in August, larger than the initially estimated $4.0 billion decline, and a $2.8 billion rise in July.

In the past 12 months, total consumer debt has fallen 2.9% to $2.412 trillion from $2.484 trillion in September 2009. However, that's less than the 3.3% year-over-year rate of decline recorded in August.

Non-Revolving Debt Rose, But Credit Card Balances Fell

The rise in consumer debt was led by non-revolving debt -- including most auto loans, personal loans, and student loans -- which increased by $10.4 billion to $1.598 trillion.

Sponsored Links

Meanwhile, revolving debt, which includes most credit credits, plunged by $8.3 billion to $813.9 billion.

A perfect storm of factors coalesced during the recent recession, resulting in steadily declining consumer credit balances. Stagnant incomes in many job segments, the loss of more than 8 million jobs from the workforce, reduced credit lines, and higher interests rates by banks/card issuers have prompted Americans to reduce credit balances over the past two years.

Most economists view the declining balances as a positive development, long-term, as Americans over-consumed in the previous decade, resulting in high and in many cases unsustainable credit card balances.

Another Challenging Shopping Season For Retailers?

Short term, however, the credit card pay-down will lower U.S. GDP growth, as it will constrain consumer spending, which historically has accounted for 65 to 70% of U.S. GDP.

September's consumer credit report is only a qualified victory for those who argue that credit expansion is required for the U.S. economy to return to a normal GDP growth rate of 2.7 to 3.3%. While non-revolving debt rose for the fifth straight month -- a trend that suggests institutions are granting more auto loans and personal loans -- revolving debt, which includes credit cards, fell for the second straight month, as Americans continued to pay-down credit card balances.

Further, if Americans' cautious stance toward credit card use continues in October, November, and December, that would likely weigh on economically important holiday shopping sales, and hurt the 2010 revenue of retailers.