Consumer Credit Growth Slows

As consumers cut back on their third quarter spending, the growth in their auto and credit card balances also slowed. Federal Reserve Board statistics show that non-mortgage borrowing slowed in July to a 7.7% annual pace (seasonally adjusted). Both revolving and nonrevolving balances slowed from their second quarter average rates. At the end of July consumer installment credit outstanding was $1.472 trillion (seasonally adjusted), of which $638 billion was revolving credit and $834 billion was in the form of auto and other personal loans not secured by real estate.

The Federal Reserve Board's Senior Loan Officer Survey for August 2000 reported continued tightening of business lending standards in the U.S., but no change in standards for consumer loans. Bank officials did report that the demand for residential mortgage loans weakened , on net, for the fifth consecutive quarter. Interestingly, mortgage loan balances held by banks have risen this past year, despite weakening demand. Bank officials attribute this to a rising share of loans with adjustable rate mortgages (ARMs) which banks are less willing to securitize because they can be more easily matched to the duration of bank liabilities than is the case for conventional 30-year fixed-rate mortgages. Also, banks reported that securitization has been dampened by an increase in the proportion of loans they make that do not conform to the size limits set by Fannie Mae and Freddie Mac.

Bank officials reported that consumer loan demand also weakened somewhat over the past three months. Given the additional declines in consumer spending since July, we expect consumer credit to slow even more during the balance of the third quarter.

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