Your Economy (No Politics)

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U.S. Consumer Credit Rises $3.35 Billion in December, Fed Says
Vincent Del Giudice in Washington


Feb. 7 (Bloomberg) -- U.S. consumer borrowing rose for a second month in December while finishing 2005 with the smallest annual gain in 13 years, a Federal Reserve report showed.

Consumer credit, or non-mortgage loans to individuals, increased by $3.35 billion to $2.16 trillion after rising a revised $568 million in November, according to figures released today in Washington. Borrowing rose 3 percent for all of last year, the slowest pace since a 1 percent gain in 1992.

Consumer borrowing through credit card loans slowed over the past five years as Americans tapped lower-cost home-equity loans. The share of cash-out refinancing in the fourth quarter for loans owned by Freddie Mac, the No. 2 buyer of mortgages, rose to the highest since the third quarter of 2000, suggesting people were still borrowing against the value of their homes instead of using credit cards.

``The change in the composition of debt has made it easier for consumers to handle larger amounts of debt,'' said former Federal Reserve Governor Lyle Gramley, senior economic adviser at the Stanford Washington Research Group in Washington.

Economists surveyed by Bloomberg News predicted a $5 billion rise in consumer credit, the median of 34 forecasts. They ranged from a decline of $1.5 billion to an increase of $8 billion.

Revolving debt, such as credit cards, fell $939 million during the month after increasing $865 million a month earlier, according to the central bank's figures. Last year's 2.6 percent increase in revolving debt was the smallest since a 2.5 percent gain in 1980.

Wachovia Corp., the fourth-largest bank in the U.S., saw profit rise 18 percent to a record in the fourth quarter, helped by a 21 percent increase in home-equity, mortgage and other consumer loans, according to the Charlotte, North Carolina-based company.

Home-Equity Loans

The ratio of consumer debt to disposable income has been falling since 2002 because of the shift to home-equity loans, Gramley said. Low interest rates encouraged this trend, and rising home prices provided consumers with more equity to borrow against, he said. The Fed lowered its benchmark interest rate to a four- decade low of 1 percent in 2003 to bolster growth.

The credit-card delinquency rate, in turn, fell to 3.7 percent in November after rising as high as 5.52 percent in February 2003, according to statistics from Moody's Investors Service.

That pattern may change after 14 consecutive rate increases by the Fed, which brought its main rate to 4.5 percent last week. A retreat in home prices in many parts of the country may further reduce home-equity borrowing, Gramley said.

``Consumer spending is going to slow,'' he said, with energy prices also ``taking a ferocious toll on consumers' budgets.''

The cash extracted by homeowners from refinancing conventional mortgages may drop to $117 billion this year from an estimated $243 billion last year, according to report today from Freddie Mac. That may curb consumer spending, which accounts for around 70 percent of the economy.

Consumer Spending

In the fourth quarter, 80 percent of loans owned by Freddie Mac that were refinanced resulted in new loan amounts that were at least 5 percent higher than the original balances.

Freddie Mac, based in McLean, Virginia, also said today that it expects the refinance share of all mortgage applications to decline this year to around 37 percent.

Auto loans and other non-revolving debt rose $4.3 billion in December after declining $298 million in November, according to the Fed's statistics.

Asian automakers led by Toyota Motor Corp. took record market share in December from U.S. companies and pushed industry sales to a full-year gain, according to industry figures released Jan. 4. General Motors Corp. and Ford Motor Co. reported lower auto sales for a fourth straight month.

Holiday spending offset higher marketing expenses and loan defaults at American Express Co., the fourth largest credit card- issuer. Fourth-quarter profit climbed 12 percent at the New York- based financial services company.

Competitors such as Citigroup Inc., the largest U.S. bank, had different results, as profit from continuing operations fell 3 percent in the fourth quarter, in part because of a surge in credit-card defaults. Many consumers filed for bankruptcy protection before a law setting stricter guidelines took effect in October.

http://www.bloomberg.com/apps/news?pid=10000103&sid=aDz4wGotcnSk