- The Washington Times - Wednesday, January 9, 2002

American consumers increased their borrowing by a record amount to finance a car-buying binge last fall, creating a big debt overhang that is likely to hold down spending this year.
The $19.8 billion borrowing surge in November was the largest ever recorded by the Federal Reserve in nearly six decades of tracking consumer finances. It followed a big $11.2 billion debt increase in October, also propelled by consumers taking advantage of zero- and low-interest loans being offered by carmakers and dealers.
While the financing incentives served to boost car sales to record levels and prop up sagging consumer spending at the end of last year, the withdrawal of the incentives this year may contribute to a falloff in consumer spending that could threaten the larger economy.
The withdrawal effect from the car-buying binge comes as rising unemployment and layoffs are subtracting from consumer income, making it harder to keep up spending.
"The roadblock can be stated simply: Consumers must be employed to spend," said Anthony Santomero, president of the Federal Reserve Bank of Philadelphia. "Softness in the labor markets could put pressure on consumer spending and affect confidence going forward."
Hopes that the worst job losses were over have been dashed since the turn of the year by a rash of new layoff announcements, including a plan by Ford Motor Co. to cut up to 20,000 jobs. Other big employers that have announced major staff cutbacks in recent days include Sears, Roebuck & Co., Motorola, International Paper and Deutsche Bank.
"If job losses persist, consumers may retrench, making the recovery slow and potentially more painful," Mr. Santomero said in a speech to the Greater Philadelphia Chamber of Commerce.
Still, he said he expects the economy to revive in the second half of the year from the accumulating effects of 11 Fed interest-rate cuts and $200 billion worth of tax cuts and spending increases put in place last year.
"We can all be confident recovery is on the way," he said. "Our country has the biggest stimulus and lowest rates we have had for a very long time. … The stimulus associated with greater government spending and lower taxes should have a significant positive impact on the economy."
Many economists have been predicting a recovery as early as this month based on the enormous stimulus in the pipeline and signs that the long recession in manufacturing is bottoming out.
The prospect of a recovery early this year has fueled a major stock rally in recent weeks. Mr. Santomero's remarks showed that Fed officials share in the growing optimism about the economy. But they are more sober about the dangers it faces right now as various economic tailwinds hit consumers.
Federal Reserve Vice Chairman Roger Ferguson cautioned investors. "I think it is too early to have strong conviction about exactly what the contours of a turnaround in the U.S. economy are likely to be," he told reporters in Geneva yesterday.
The deteriorating financial profile of American families presents a major obstacle to growth, even as they continue to receive support from tax-rate cuts and dramatically lower energy prices as well as from interest rates.
Surveys show that consumers increasingly want to save more money and reduce debt loads that have grown to a record 100 percent of disposable income.
They had made some progress toward those goals in the months before going on their fall car-buying spree.
"Just as huge levels of household borrowing powered the consumption boom of the 1990s, unmanageable debt burdens threaten to become the hallmark of the recession," said Jane D'Arista of FOMCAlert, a Fed-watching group.

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