Consumers increased borrowing $9.5 billion in May, most since Nov.

Automakers' incentives, rising incomes play role

July 09, 2002|By BLOOMBERG NEWS

WASHINGTON - U.S. consumers borrowed more in May than at any time since November, as their spending is helping fuel a rebounding economy.

Borrowing through credit cards and other types of loans increased by $9.5 billion after an $8.6 billion rise in April, the Federal Reserve said yesterday.

"Consumer spending is alive and well," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. "The consumer's willingness to borrow is really the best confidence indicator of the economy."

General Motors Corp. and other carmakers encouraged more borrowing by offering discounts to sell more vehicles last month, and that might boost borrowing in coming months. Consumer spending is important because it accounts for two-thirds of the economy.

Non-revolving loans, which include those for automobiles, rose $7.2 billion in May after rising $4.2 billion the previous month. Credit card and other revolving debt rose $2.4 billion in the month, after a $4.4 billion increase in April. May borrowing was the highest since a $20.4 billion surge in November.

Consumers are able to take on more debt because incomes are on the rise. Personal incomes were 3 percent higher in May than in the corresponding month last year. That was the largest year-over-year increase in seven months, the latest government figures showed.

"Real wage income has been growing solidly, which, along with low interest rates, has been supporting consumer sales," said Steven Wood, chief economist at FinancialOxygen Inc., a Walnut Creek, Calif., provider of financial services to banks.

The Fed's consumer credit report doesn't include loans secured by real estate, such as mortgages and home equity lines of credit. Mortgage debt is more than three times the amount of credit card debt, auto loans and other personal borrowing. Home mortgage debt increased to $5.87 trillion at the end of the first quarter from $5.74 trillion at the end of the fourth.

Consumer spending rose at a 3.3 percent annual pace from January to March after rising at a 6.1 percent rate in the last three months of last year. But spending fell 0.1 percent in May.

There are signs that borrowing might keep rising. New cars and light trucks sold last month at a 16.5 million-vehicle annual rate, 5.1 percent more than in May, automakers reported last week. General Motors led the industry, selling 4.3 percent more than in June of last year as the world's largest automaker boosted cash incentives by as much as $750 on some pickup trucks and sport utility vehicles.

June was "a very solid month," Paul Ballew, executive director of industry analysis at General Motors, said in a conference call with investors last week. "We continue to expect a moderate recovery and an expansion in the economy."

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