U.S. Consumers and Businesses Use Less Credit in February

Online, May 12, 2010 (Newswire.com) - Consumer borrowing fell again in February, reflecting weakness in credit cards and auto loans. Analysts said the sharp reduction showed that the weak economy is still making consumers hesitant to take on more debt. The Federal Reserve released a report showing that overall consumer borrowing declined by $11.5 billion in February, which surprised analysts. Economists had widely forecasted that borrowing would rise by approximately $500 million instead. The February decline was the 12th decrease in 13 months as consumers avoid borrowing in the face of a deep economic recession and high unemployment.

Lingering fears about job security with unemployment still at close to record levels and a move by banks and regulators to tighten credit standards following the severe housing and financial crisis of the past two years.

A resurgence in consumer borrowing (and spending) is seen as crucial to the overall economic recovery, still struggling to emerge from the worst recession since the 1930s. Federal Reserve Chairman Ben Bernanke said on April 7th that the economy seems to have stabilized and is growing again but threats remain, "We are far from being out of the woods," he told a business audience in Dallas. "Many Americans are still grappling with unemployment or foreclosure or both."

In fact, unemployment remains at high levels - at nearly 10% - causing potential borrowers to avoid payday loans, personal loans, small business loans and many other forms of credit until the recovery becomes more secure. The economic catch-22 is that weakness in borrowings can stagnate any nascent recovery before it gets fully underway. Until potential borrowers confidence rises, consumers who are opting to defer payday loans or other credit options are likely to continue to do so until after the economic recovery strengthens. Economists are hoping that consumer borrowing will stabilize in coming months and resume steady growth although they caution that the rebound will be restrained by tighter credit restrictions imposed by many banks and regulators in the wake of the recent financial crisis.

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