Consumer borrowing rose unexpectedly in January

Consumer borrowing rose unexpectedly in January after three months of declines, but the small increase did not shake economists' views that borrowing will remain weak this year as mass layoffs persist amid the recession.

The Federal Reserve said Friday that borrowing increased at an annual rate of $1.76 billion in the first month of the year. Economists expected borrowing to decline at a rate of $5 billion.

The small gain came mainly from the category that includes credit cards, which rose at a 1.2 percent rate in January after dropping 9.5 percent in December. The category that covers auto loans rose 0.6 percent after a smaller 0.1 percent rise in December.

The increases were attributed to the stronger performance of retail sales which posted a 1 percent rise in January, the best showing in 14 months. While that increase was unexpected, analysts noted that it was still modest and followed a six-month decline.

Consumer spending accounts for about 70 percent of U.S. economic activity, and borrowing fell at an annual rate of $7.48 billion in December after a $9.13 billion drop in November. The December figure was slightly larger than previously reported while the November number was smaller.

But the economy, especially the labor market, appeared to darken last month. The government reported Friday that the unemployment rate surged to a 25-year high of 8.1 percent in February as employers slashed another 651,000 jobs. Since the recession began in December 2007, the economy has lost a net total of 4.4 million jobs, with more than half coming in the past four months.

Americans, worried about the possibility that they could be laid off, have cut back on their spending and reduced borrowing. Many are trying to rebuild their savings to help cope with a recession that is already the longest in more than a quarter-century.

The government reported Monday that the personal savings rate jumped to 5 percent in January, the highest level since 1995.

Many economists believe consumer spending and borrowing will remain weak at least through the first half of this year.

David Wyss, chief economist at Standard & Poor's in New York, said he doesn't expect the recession will end until midyear. And even after the overall economy stops declining, the rebound will be too weak to stop unemployment from rising further, he added.

"People are still scared stiff to spend money," Wyss said.

The cutbacks in consumer spending have been a severe drag on the economy. The gross domestic product fell at an annual rate of 6.2 percent in the final three months of 2008, the biggest decline in 26 years. About half of that drop stemmed from a sharp falloff in consumer spending during the fourth quarter.

The nation's retailers and automakers have been hit especially hard by the slowdown in consumer spending. U.S. automakers reported that sales dropped 41 percent in February compared with the same month last year despite offers of huge rebates and low-interest loans.

Sales at General Motors Corp. fell 52 percent, Ford Motor Co. reported a 48 percent decline and Chrysler LLC's sales dropped 44 percent.

The small borrowing increases in January left total consumer credit at $2.564 trillion in January. The Fed report does not include loans backed by real estate, which means home mortgages and home equity lines of credit are not covered.