U.S. consumers reduced their borrowing for a third straight month in May as the millions of jobs lost because of the coronavirus pandemic made households less eager to take on new debt.
The Federal Reserve reported Wednesday that consumer borrowing declined by $18.3 billion in May, a drop of 5.3%. Borrowing had fallen 4.5% in March and plunged 20.1% in April. That was the biggest one-month decline in percentage terms since the end of World War II.
Borrowing by consumers in the category that covers credit card debt fell $24.3 billion in May following April’s record $58.2 billion decline. Borrowing in the category that covers auto loans and student debt rose $6 billion, reversing part of a $12 billion decline in April.
Consumer borrowing is closely watched because of clues it can provide about the willingness of households to take on more debt to support consumer spending, which accounts for 70% of U.S. economic activity.
Economists believe that the widespread shutdowns triggered by efforts to contain the coronavirus pushed the economy into a deep downturn, with the gross domestic product expected to post a record-breaking decline of 30% in the April-June quarter.
The Trump administration is forecasting a sharp rebound in the July-September quarter but private economists are worried that the resurgence of coronavirus cases in recent weeks in many areas may put the recovery at risk.
It marked the first time in a decade that overall consumer borrowing has fallen for three straight months. The declines left total borrowing at a seasonally adjusted $4.11 trillion in May.
Nancy Vanden Houten, senior economist at Oxford Economics, said that while consumer spending did show a big gain in May, consumers financed the increased spending with their savings and not through higher borrowing.
She said that she expected credit card borrowing would decline this year “due to restrained consumer outlays and tighter credit card lending standards.” But she said that the category that covers auto and student loans would likely show modest growth.
The Fed’s monthly credit report does not include home mortgages or any other type of loans secured by real estate such as home equity loans.