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July 12, 2011 > Ahead of the Bell: Consumer Credit

Ahead of the Bell: Consumer Credit

Submitted By AP Wire Service

WASHINGTON (AP), Jul 08 - Americans borrowed more money in May for the eighth consecutive month, economists say. But the increase is expected to be lower than in April.

Economists forecast that consumers increased their borrowing by $5 billion, according to a survey by FactSet The Federal Reserve will release the report at 3 p.m. Eastern on Friday.

In April, consumer borrowing rose by $7.2 billion, reflecting greater demand for school and auto loans. But a category that measures credit cards fell for the second time in three months and has risen only twice since August 2008.

The overall increase pushed consumer borrowing to a seasonally adjusted annual level of $2.43 trillion in April. That was just 1.7 percent higher than the nearly four-year low of $2.39 trillion hit in September.

Borrowing is a sign of confidence in the economy. Consumers tend to take on more debt when they feel wealthier. That boosts consumer spending, which accounts for 70 percent of economic activity. Ultimately, it gives businesses more faith to expand and hire.

Households began borrowing less and saving more when unemployment spiked during the Great Recession. Many have resisted pulling out their credit cards in the two years since the downturn ended. Through April, credit card use was down nearly 19 percent over the past 20 months and has dropped 5 percent over the past year.

High unemployment, slow wage growth, and a weakening housing market have forced people to be more frugal. Analysts believe the rise in student loans reflects the slumping economy: more people who have lost jobs have returned to school to get training for new careers.

Economic growth has slowed this year, in part, because of temporary factors. High gas prices cut into consumer spending on discretionary goods. And manufacturers have struggled with supply disruptions caused by the natural disasters in Japan.

In May, consumer spending did not show any gain. And after adjusting for inflation, it actually dropped 0.1 percent.

But economists are hopeful that the second half of the year will show an improvement. Gas prices have fallen since peaking in early May at a national average of nearly $4 per gallon. And the parts shortage out of Japan has started to abate.

The number of people applying for unemployment benefits fell to a seven-week low last week. And many of the nation's largest retailers, including Target Corp., Costco Wholesale Corp., and Limited Brands, reported sales in June that beat Wall Street expectations.

An improving economy could boost consumer borrowing in the coming months. But economists don't expect consumers to load up on debt the way they did during the housing boom. During that period, Americans felt wealthier and more willing to take on increased debt because of the soaring value of their homes.

The Federal Reserve's borrowing report includes auto loans, student loans and credit cards but excludes mortgages and loans tied to real estate.

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