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Consumers Borrow More in October as Economy Improves

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Flickr user, Miran Rijavec

Americans stepped up their borrowing in October to buy cars and attend college, and they also charged a little more to their credit cards. The second straight monthly gain in overall borrowing suggests consumers are growing more confident in the economy ahead of the crucial holiday buying season.

Total consumer borrowing rose by $7.3 billion, the Federal Reserve said Wednesday. September and October’s gains reversed a steep drop in borrowing from August, when it fell by the most in 16 months.

The October increase reflected a 5.3 percent increase in borrowing in the category that includes car and student loans. The category that covers credit card purchases rose 0.6 percent, which matched September’s gain after a revision.

Throughout the summer, many Americans were cautious about taking on high-interest debt in a weak economy. But that may be changing after a number of signs suggest conditions have improved. The economy grew at an annual rate of 2.5 percent in the July-September period, nearly three times the growth rate in the first six months of the year. Most economists expect similar growth in the final three months of the year.

Consumers are spending more freely and their confidence is on the rise again. In November, the unemployment rate fell to 8.6 percent, the lowest point in two and a half years. The economy has generated 100,000 or more jobs five months in a row — the first time that has happened since April 2006.

Still, economists worry that the spending gains are temporary because wages are barely keeping pace with inflation. Without more jobs and higher pay, consumers may be forced to cut back on spending. That would slow growth. Consumer spending accounts for about 70 percent of economic activity.

Economists also fear Europe’s debt crisis will lead the continent into a recession, which would also hamper U.S. growth. And if Congress doesn’t extend the Social Security tax cut and emergency unemployment benefits by the end of this month, $165 billion in potential spending could be sucked out of the economy next year.

Households began borrowing less and saving more when the country fell into a recession and unemployment surged. While economists believe Americans will gradually increase borrowing in coming months, they do not expect consumers to load up on debt the way they did during the housing boom.

Americans felt wealthier then and were more willing to take on added debt because of the soaring value of their homes.

The Federal Reserve’s borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

(Copyright 2011 by The Associated Press. All Rights Reserved.)

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