Consumer borrowing jumps 7.2% in March
Posted on Thursday, May 8, 2008
URL: http://www.nwanews.com/adg/Business/225101/
Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month, in what was seen as a sign of rising economic stress.
Also, worker productivity rose by a better-than-expected amount in the first three months of the year, while labor cost pressures eased.
Pending home sales dropped to a new low in March, an industry group reported, signaling the housing slump has yet to bottom out even as the spring selling season gets under way.
On Wall Street, stocks tumbled Wednesday as investors grew concerned about what the rise in oil prices might do to economic growth. Oil climbed to a record near $ 124 per barrel before settling at $ 123. 53 on the New York Mercantile Exchange. The Dow Jones industrial average fell 206. 48 points to close at 12, 814. 35.
The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7. 2 percent, compared with a 3. 1 percent rate of increase in February.
The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans. The increase in consumer debt totaled $ 15. 3 billion at an annual rate in March, much bigger than the $ 6 billion increase that economists had been expecting.
Economists said consumers were being forced to make greater use of their credit cards during hard economic times when they are being battered by job losses, soaring gasoline prices and higher food costs.
“This represents distressed borrowing. Consumers need cash and they have turned back to their credit cards to fill the void left by lost jobs and weaker incomes,” said Mark Zandi, chief economist at Moody’s Economy. com.
Borrowing on credit cards was up at an annual rate of 7. 9 percent, compared with a 5 percent gain in February, while borrowing in the category that includes auto loans jumped by 6. 8 percent, compared with a 2 percent increase in February.
The overall growth in debt of 7. 2 percent at an annual rate was the biggest gain since an increase of 8. 25 percent in November.
Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.
The Fed’s measure of consumer borrowing, which does not include debt secured by real estate such as mortgages or home equity loans, stood at a record $ 2. 558 trillion in March.
The Labor Department re- ported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 2. 2 percent in the first quarter. That was slightly higher than the 1. 5 percent increase that had been expected.
In a sign that inflation could be easing, labor cost pressures eased a bit. Unit labor costs rose at an annual rate of 2. 2 percent, down from a 2. 8 percent rise in the final three months of last year.
While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs.
However, if productivity is increasing, it allows businesses to finance higher wages out of the increased output.
The Federal Reserve closely monitors developments in productivity because wage pressures are often the main way inflation gets out of control.
The Fed last week boosted a key interest rate for the seventh time since September, but the increase was a smaller quarter-point move and the Fed signaled that it may pause its rate-cutting campaign in part because of concerns about inflation.
Analysts read the bigger-thanexpected rise in productivity and the smaller increase in unit labor costs as a good sign that inflation pressures, at least on the labor front, are remaining under control and the country is not facing the danger of a wage-price spiral.
“There is certainly nothing to worry about here from a cost-push inflation perspective,” said Ian Shepherdson, chief U. S. economist at High Frequency Economics.
Many analysts think the country has already toppled into a recession. But overall economic growth, as measured by the gross domestic product, eked out a 0. 6 percent rate of increase in the first three months of the year, the same anemic pace as the final three months of last year.
The rise in productivity in the year’s first three months occurred as the number of hours worked declined at an annual rate of 1. 8 percent.
That reflected layoffs that have occurred as businesses cut back on their payrolls in the face of an economic slowdown triggered by a steep slump in housing and a severe credit crunch that has resulted in billions of dollars of losses from financial firms.
The 2. 2 percent rate of productivity growth in the first quarter was up slightly from a 1. 8 percent increase in the fourth quarter of last year.
Productivity for all of 2007 rose by 1. 8 percent, up a bit from the 1 percent gain in 2006. However, both of those increases were far below growth levels of the past decade as productivity experienced a healthy rebound, reflecting all the investments made in productivity-enhancing equipment such as computers.
The National Association of Realtors’ seasonally adjusted index of pending sales for existing homes fell to 83. 0 from a downwardly revised February reading of 83. 8, the index’s previous low. The index stood at 103. 9 in March 2007.
A reading of 100 is equal to the average level of sales activity in 2001, when the index started.
Global Insight economist Patrick Newport said the combination of job losses, tight credit conditions and falling home prices is pummeling the housing market and chasing potential buyers to the sidelines to wait out the slump.
“Prices are dropping nearly everywhere at an accelerating rate and buyers don’t want to buy an asset that’s losing its value,” he said. Information in this article was contributed by Martin Crutsinger and J. W. Elphinstone of The Associated Press.