Consumer Borrowing Climbed Most in 3 Years on Student Loans, Auto Financing

Consumer borrowing in the U.S. rose in July by the most in over three years, according to the Federal Reserve, led high by a gain in non-revolving credit, which includes student loans. Credit increased $12 billion in July after a revised $11.3 billion rise in June. Economists had projected a much more modest $6 billion gain, but the rise in non-revolving loans was the greatest since November 2001 as cuts to education spending have done away with many state-sponsored scholarships and loans.

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Meanwhile, revolving credit had its biggest one-month decline in July in six months, indicating that Americans are cutting back on non-essential spending. Credit cards are one major form of revolving credit, and with consumer confidence waning and the job market depressed, Americans are being more careful about how they spend their money. “The softness in revolving credit is indicative of a cautious consumer,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. Shapiro credits the school loans and auto finance for the overall gain. The Fed’s report does not include debt secured by real estate, such as residential mortgages and home equity lines of credit.

Non-revolving debt rose by $15.4 billion in July, while revolving debt fell by $3.4 billion. The total increase in credit reflected a non-seasonally adjusted rise of $15.6 billion, to $385.7 billion. The unadjusted figures also show a small rise in non-revolving borrowing at commercial banks, finance companies, and credit unions, which may be the result of a pickup in car sales during July. Vehicle sales climbed to a 12.2 million annual rate in July, up from a 11.41 million pace in June.

While the overall decline in spending on consumer goods may be a negative, Target (NYSE:TGT) has reported reported increased same-store sales in August, and more importantly, bad debt declined to only $15 million, down from $138 million a year earlier. Consumers aren’t simply spending less, they are being more responsible about how they spend, making sure they don’t spend beyond their means. For that reason, if the economy were to turn around, unemployment were to decline, and incomes were to rise, spending would likely pick up as well.

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