Headline: Decline in Use of Credit Tied to Job Layoffs

Source: Los Angeles Times, 8 August 2001

URL: http://www.latimes.com/business/la-000064237aug08.story?coll=la%2Dheadlines%2Dbusiness

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."

-- Andre Weltman (aweltman@state.pa.us), August 08, 2001

Answers

"...The figures, which don't include mortgage-related borrowing..."

Elsewhere, the observation has been made that many consumers are "rationally" shifting debt onto their mortagages (refinancing, revolving equity loans, etc) because the interest rates are favorable compared to typical credit car or auto loans. So, I don't know that this news story implies less overall debt.

(On a related note, I was chatting with my local insurance agent this morning and she observed that alot of her customers who bought new cars and boats in the past 2 or 3 are now trying to sell them...just another datapoint supporting my independent observation of many new car "For Sale" signs along the roads here in southcentral Pennsylvania. I also have observed an apparent jump this year in the number of properties about to be auctioned by the county taxman for unpaid taxes...sometimes not a huge amount of money due, really... as shown by local newspaper listings this week.)

"We're getting some reduction in that, which is good"

Well, perhaps it's good in the same way that a patient with a fever of 107 degrees F looks better when his temperature slides to 101... unless it's a trend on the way to the ambient temperature of the grave.

-- Andre Weltman (aweltman@state.pa.us), August 08, 2001.

Fine piece, and astute observation of it, Andre.

Boy, you don't miss a thing.

-- JackW (jpayne@webtv.net), August 08, 2001.

Why, thank you, JackW.

It's useful to get the perspective of business people in a small town. The owner of the hardware store, the insurance agent with an office & home in the community, the mechanic at the local brake & muffler shop, these are the folks who know how hard people are starting to hurt. I always try to raise the issue of "the economy" with them when the occasion arises. Interesting what comes out. Wish what I think I'm seeing wasn't supported by their observations, but it's useful to get the "independent" observations.

-- Andre Weltman (aweltman@state.pa.us), August 08, 2001.

I'm kind of dumb about economics, but read a lot, trying to educate myself. I'm always looking for a logic thread, or, perhaps, better said, a thread of common sense. This reeks of common sense, and I find it very enlightening.

-- Loner (loner@bigfoot.com), August 08, 2001.

I'm planning to have some tile work done in my home. I called a couple of contractors to measure and give me a bid. I asked them how the construction market was doing in the area, and both said they are just now beginning to feel the downturn. Both said that they are now 2 weeks out, whereas 6 months ago they were 6 months out for new construction and remodels. They are expecting the worse because of layoffs and plant closings in the area. The biggest tile contractor said they are having to go outside the area to bid for new jobs, something they haven't had to do for 5 years.

I believe the best source of information on the temperature of your local economy, is to talk to people in various professions. I see more used car lots popping up, and new car lots are busting at the seams.

The temperature reached 105 today. I went to the mall to cool down and to observe how many shoppers were carrying shopping bags. I wandered into JC Penny's, and there were more store clerks than shoppers. Not many shoppers were carrying bags, they were there to window gaze, stay cool, and people watch like me.

-- CAkidd (CAkidd_94520@yahoo.com), August 08, 2001.