US consumers cut back on debt

The Federal Reserve said on Tuesday that consumer borrowing fell at an annual rate of 3.7% in August, before the financial crisis became acute in September, forcing the government to approve a $700bn rescue of the financial industry.

August's decline in consumer credit marked the first time that total borrowing had fallen since a 4.3% rate of decline in January 1998.

The weakness reflected a big decline of 5.4% at an annual rate in the category that includes auto loans and a 0.8% rate of decline in the category that includes credit cards.

The 3.7% rate of decline for overall borrowing followed a 2.4% rate of increase in borrowing in July.

Consumer borrowing, which the Fed defines as all loans not secured by real estate, totaled $2.58 trillion at an annual rate in August, down by $7.88bn from the July level. That was a much weaker performance than the $5.25bn increase in borrowing that economists had been expecting.

Economists are worried that consumer spending, which accounts for two-thirds of total economic activity, will decline in the July-September quarter. That has not happened since 1991 and could set the stage for the economy to slip into a recession.

The economy is being battered at the moment by rising job layoffs, a prolonged housing slump and the most severe credit squeeze in decades as banks cut back on their lending in the face of record defaults for home mortgages.

The 5.4% drop at an annual rate in the category that includes auto loans, reflected the struggles automakers are having this year as the weak economy and soaring gas prices have cut into sales.

The 0.8% rate of decline in borrowing in the category that covers credit cards followed a 5% jump in this category in July.

- AP