Consumer borrowing falls by record amount

WASHINGTON -- Consumers slashed their borrowing in July by the largest amount on record as job losses and uncertainty about the economic recovery led Americans to rein in their debt.


Economists expect consumers will continue to spend less, save more and trim debt to get household finances into better shape. But such action is a recipe for a lethargic revival, as consumer spending accounts for 70 percent of economic activity.

The Federal Reserve reported Tuesday that consumers ratcheted back their credit by a larger-than-expected $21.6 billion from June, the most on records dating to 1943. Economists expected credit to drop by $4 billion.

Wary consumers and hard-to-get credit both factor into the scaled-back borrowing. Economists are split on which is having the bigger influence.

"It's really a tug of war," said Mark Williams, a professor of finance and economics at Boston University and a former Fed bank examiner. "It's true that consumers are being more responsible, saying, 'I don't really need that extra credit card,' but it is more related to banks clamping down on lending."

Erik Hurst, an economics professor at the University of Chicago Booth School of Business, says it is impossible to know for sure.

"We are seeing declines in demand for loans from consumers, but also declines in the supply of loans from banks ," he said.

Last month, a Fed survey of bank loan officers found somewhat weaker demand for all types of consumer loans. But fewer banks reported tightening their standards on credit card and other consumer loans, the survey said.

A report earlier this year by FICO, the company that produces the most widely known credit scores , found that companies slashed limits for an estimated 58 million card holders in the 12 months ended in April, even though a high percentage had good credit scores when their limits were cut.

The cuts affected about a third of consumers, b ut most people did not see a big impact on the credit scores because lenders often cut limits on cards that were unused or lightly used.