Oct. 7 (Bloomberg) -- U.S. consumer credit fell in August for a seventh straight month as banks maintained restrictive terms and job losses made households reluctant to borrow.

Consumer credit fell by $12 billion, or 5.8 percent at an annual rate, to $2.46 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $19 billion in July, less than previously estimated. The series of declines is the longest since 1991.

Labor Department figures last week showed there were more job cuts than forecast in September and the jobless rate kept rising. The data prompted President Barack Obama to say he’s working to “explore any and all additional measures” to spur growth, and underscored forecasts for the Federal Reserve to keep its benchmark interest rate near zero through next year.

“Demand for credit has just gone through the floor,” said Ellen Zentner, senior macro economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. “Households are in paying- down-debt mode, they’re not in the mode of taking on new debt.”

Economists had forecast consumer credit would drop $10 billion in August, according to the median of 36 estimates in a Bloomberg News survey. Projections ranged from a decline of $15 billion to an increase of $6.2 billion. The Fed initially said consumer credit decreased a record $21.6 billion in July.

Stocks Gain

Stocks, which were little changed most of the day, rallied late as bank shares climbed following an analyst’s upgrade. The Standard & Poor’s 500 Index increased 0.3 percent to close at 1,057.58. Treasury securities rose, sending the yield on the benchmark 10-year note down to 3.18 percent at 5:16 p.m. in New York from 3.26 percent late yesterday.

Revolving debt, such as credit cards, decreased by $9.91 billion in August, the Fed report showed. Non-revolving debt, including loans for automobiles and mobile homes, fell by $2.07 billion. The Fed’s report doesn’t cover borrowing secured by real estate.

The category that covers car loans fell at a slower pace as the government’s “cash for clunkers” program helped push up personal spending in August by the most since October 2001.

Purchases jumped at a 1.3 percent annual rate in August, the Commerce Department said Oct. 1. The gain included a 5.8 percent increase in inflation-adjusted spending on durable goods such as autos, furniture and other long-lasting items.

Incomes climbed 0.2 percent for a second month in August and inflation decelerated, the report showed.

Cash for Clunkers

The clunkers program, which expired Aug. 24, helped boost auto sales to a 14.1 million annual rate in August, the highest in more than a year. Auto sales dropped 35 percent in September, to a 9.2 million pace, according to Bloomberg data.

“Outside of the cash-for-clunkers spending frenzy, which inherently may have required a purchaser to take out a loan, the decline in consumer credit would have continued to accelerate in August,” Bank of Tokyo-Mitsubishi UFJ’s Zentner said. “Come September, we’ll see consumer credit pick up its old trend and continue to drop” at an accelerating pace.

Economists surveyed last month by Bloomberg estimated consumer spending increased at a 1.7 percent rate in the third quarter, while saying it will ease to a 1 percent pace in the last three months of the year as government stimulus measures fade and unemployment continues to rise.

Job Losses

The U.S. has lost 7.2 million jobs since the start of the recession in December 2007. That is the biggest decline since the Great Depression. Payrolls fell by 263,000 in September following a 201,000 drop the prior month, while the unemployment rate rose to 9.8 percent, the highest since 1983.

“Growth will likely not be strong enough” to reduce the jobless rate “quickly,” and other labor indicators “paint a bleaker picture,” New York Fed President William Dudley, said in a speech Oct. 5.

U.S. credit-card defaults surged to a record in August as unemployment rose to the highest in a quarter century, Fitch Ratings said Oct. 1. Write-offs for loans deemed uncollectible climbed to 11.52 percent, compared with 10.55 percent in July, according to Fitch’s Prime Credit Card Charge-off Index. Loans at least 30 days delinquent, an indicator of future losses, “remained elevated” at around 5.5 percent, Fitch said.

Defaults Surge

Card issuers have struggled with rising defaults as the recession drove up unemployment. Credit-card write-offs typically track the U.S. jobless rate. The percentage of soured loans surged at the biggest U.S. card lenders, including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., the banks reported in federal filings on Sept. 15.

Even so, recent data have shown manufacturing, housing and services are stabilizing, helping to boost stock prices and bolstering Americans’ finances. Household wealth rose by $2 trillion in the second quarter, the first increase in almost two years, according to the Fed’s Flow of Funds report on Sept. 17.

American Express Co., the biggest U.S. credit-card issuer by purchases, said Sept. 24 it plans to reverse compensation cuts made earlier this year because the economy is on the mend.

A memo sent to the New York-based company’s employees from Chief Executive Officer Kenneth Chenault cited “a somewhat more positive outlook about economic conditions in the coming months.”

Chenault also said “the challenges we face are far from over,” pointing to “stubbornly high” unemployment, lower consumer spending and decreases in home prices. “We are likely to see a prolonged period of slow economic growth.”

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: October 7, 2009 17:21 EDT