Consumer borrowing dropped $9.5 billion in August

October 7, 2011 - 4:25 PM

WASHINGTON (AP) — Consumers slashed their borrowing in August by the most in 16 months. The drop suggests many worried about taking on new debt while the economy slumped and the stock market fluctuated wildly.

Fewer people used their credit cards. And a measure of demand for auto and student loans fell.

Total borrowing dropped $9.5 billion in August, the Federal Reserve said Friday. In July, borrowing increase $11.9 billion.

Americans have been struggling all year with high unemployment, meager pay raises and pricier goods and gas. That has depressed consumer spending, which fuels 70 percent of economic growth.

In August, consumer confidence tumbled to a two-year low, and retail sales were flat. The weak economy, along with gridlock in Washington and heightened concerns over Europe's debt crisis, rattled financial markets.

The August drop in borrowing was the largest since April 2010. Prior to that, consumers had increased their borrowing for 10 straight months.

Borrowing for auto and student loans plunged $7.2 billion in August. A category that includes credit cards fell $2.3 billion.

The overall decline lowered total borrowing to a seasonally adjusted $2.44 trillion. Borrowing is just 2.1 percent higher than the recent low hit in September of last year.

The August decline came as a surprise to economists who had been expecting a solid increase for the month. Some analysts said they believed the figure overstated the weakness in borrowing and reflected trouble the government has with seasonally adjusting the borrowing figures.

Troy Davig, an economist at Barclays Capital, said he expected borrowing to continue rising at a modest pace in coming months, reflecting his expectation that consumers will keep borrowing cautiously.

"We are looking for consumer borrowing to keep rising slowly at a pace that will not get ahead of income growth," Davig said.

Households began borrowing less and saving more when the country fell into recession and unemployment surged.

While economists believe borrowing will gradually increase in coming months, they don't expect consumers to load up on debt the way they did during the housing boom. Americans felt wealthier then and were more willing to take on added debt because of the soaring value of their homes.

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.