Fed Says Consumer Debt Rose 0.3% During Fourth Quarter

Household debt in the U.S. climbed 0.3 percent in the fourth quarter as student and auto loans rose along with credit-card balances, according to a Federal Reserve Bank of New York survey.

Consumer indebtedness rose by $31 billion to $11.34 trillion, according to a quarterly report on household debt and credit released today by the Fed district bank. Mortgage balances were little changed at $8.03 trillion and home-equity lines of credit fell by 1.7 percent to $563 billion.

“The report shows some clear signs of healing in consumer debt markets,” James McAndrews, executive vice president and director of research at the New York Fed, said at a press conference in New York. “While it is too soon to conclude that a trend has been established in which households are beginning to increase their debts again, there are signs that the four- year long contraction is slowing.”

The U.S. economy expanded at a 0.1 percent annual rate during the fourth quarter, according to revised figures released by the Commerce Department today, as stronger consumer spending and a rebound in residential real estate blunted the impact from cuts in military outlays running at a 22 percent annual pace.

The “recent improvement” in the housing market has been accompanied by the increase in consumer borrowing, and household delinquency rates are continuing to “slowly recover,” McAndrews said. As of year-end, 8.6 percent of debt was in “some stage of delinquency,” down from 8.9 percent in the third quarter, the New York Fed’s survey showed.

Housing Recovery

The recovery in the housing market does “help clean up the balance sheet for consumers” and “allows them to expand their consumption once again,” McAndrews said to reporters after his speech.

Auto loans climbed by $15 billion, outstanding student loans increased $10 billion and credit-card balances were up by $5 billion, according to the report. Americans have cut debt from a peak of $12.68 trillion in the third quarter of 2008, according to the New York Fed’s data.

McAndrews said that while he sees “signs of reduced headwinds and possibly greater monetary policy traction,” he remains “cautious about the outlook.”

The tax increases that took effect at the beginning of the year “reduces disposable incomes significantly for many households” and will probably result in consumer spending that will “weaken some” this quarter, McAndrews said. There also are “several vexing fiscal policy issues on the immediate horizon” that may damage growth, he said.

‘Major Plus’

A “major plus for the economy” has been the housing market, which may give a boost to growth of 0.5 percentage point in 2013, McAndrews said, citing improvements in housing starts, home sales and prices. In addition, manufacturing has “begun to look a bit brighter as well” and consumer spending has “clearly strengthened,” he said.

“Of course the quickening pace of auto, home, and capital goods sales and orders, all interest-sensitive goods, is consistent with the highly accommodative stance of monetary policy, which not only lowers interest rates but enhances credit availability as well,” McAndrews said.

“Evidence that interest-sensitive sectors are growing more rapidly now is the best evidence we have” of the growing effectiveness of monetary policy, he said to reporters.

The Standard & Poor’s 500 Index rose 0.5 percent to 1,523.12 at 1:48 p.m. in New York, while the yield on the U.S. 10-year Treasury note was little changed at 1.9 percent.

New Originations

New mortgage originations rose to $553 billion in the fourth quarter, and have been climbing since the third quarter of 2011, the New York Fed said in its report. About 210,000 consumers showed new foreclosures on their credit reports during the last three months of 2012, down 13.3 percent from the prior quarter.

“The data provides early evidence that consumers may be reaching the end of the four year deleveraging cycle, though we’ll need to see if this is sustained in upcoming quarters,” Andrew Haughwout, vice president and economist at the New York Fed, said in a statement released by the district bank.

The New York Fed said the report is based on data compiled by the bank’s Consumer Credit Panel, a nationally representative random sample from Equifax Inc. credit-report data.

To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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