Will That Be Debit or Credit? NEITHER

Consumer credit in the United States increased by its slowest pace in eight months in June, as Americans continue to remain cautious about a dismal economy and high unemployment.

The Federal Reserve reported on Tuesday that consumer borrowing rose by a seasonally adjusted $6.46 billion to $2.58 trillion, the smallest gain since October. The amount fell well-short of estimates, as economists projected a $10.3 billion increase, according to the median forecast in a Bloomberg survey. Furthermore, the central bank revised May’s consumer credit growth of $17.12 billion down to $16.70 billion.

Although consumer credit increased for the 10th consecutive month in June, it was mostly driven by nonrevolving credit. The category, which includes auto financing and student loans, increased by $10.15 billion to $1.713 trillion on a seasonally adjusted basis. Not surprisingly, Americans are curbing their appetite for plastic debt. Revolving credit, which includes credit card debt, fell by $3.70 billion to $864.62 billion. It was the biggest pullback since April 2011 and a sharp contrast to May’s revolving credit surge of $7.5 billion.

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“The deleveraging process amongst consumers continues on the one hand, while on the other, those pursuing further education are taking on additional burdens,” says Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., according to WSJ. “Consumers are better prepared to take on the back-to-school shopping season soon getting underway, while the rising debt burden amongst those who should be relied upon to form new households is likely to remain a heavyweight around the neck of the housing market.”

The results echoed the recent decline seen in consumer spending. According to the Commerce Department, consumer spending increased at a sluggish 1.5 percent annual pace in the second quarter, the slowest rate in a year. Furthermore, Americans stashed away more cash in June than previously seen in the year, as the savings rate reached a 2012 high of 4.4 percent.

The Fed report weighed on credit card stocks. Despite a broad market rally, Mastercard (NYSE:MA), Visa (NYSE:V) and Capital One (NYSE:COF) all closed in the red on Tuesday. However some names such as Discover Financial Services (NYSE:DFS) and American Express (NYSE:AXP) managed to gain nearly 1 percent. Last month, Visa and Mastercard were both downgraded by UBS (NYSE:UBS) Investment Research to Sell from Neutral. The firm cited concerns about lower consumer spending. “We believe both companies’ exposure to a slowing consumer spending backdrop makes a slowdown in key metrics simply unavoidable,” UBS analyst John Williams explained in a note, according to Reuters.

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