WASHINGTON -- Consumer installment credit grew at a 7.9% annual rate in July, the smallest gain in five months and less than half the advances seen in the two prior months, the Federal Reserve reported yesterday.

But the Fed said a one-time change in calculating the "other" category of credit caused the overall gain to be three percentage points less than it otherwise would have been.

Even if the gain had been three points higher, the overall gain still would have been lower than analysts had expected.

Credit grew 16% in June and 16.6% in May. Nonetheless, the July report still showed robust demand for key types of credit. Auto credit surged at a 16.5% rate in July, down from a 20.1% gain in June. And revolving credit grew 14%, down slightly from a 15.6% increase in the previous month.

Meanwhile, the other category of credit, including that for mobile homes, fell 11.3% in July, erasing the 11.2% increase in June. The Fed indicated that some types of loans from finance companies were removed from this category, causing the drop.

Economists say recent gains in consumer credit may be slightly overstating household demand for purchases made with such credit. They attribute this exaggeration to credit card companies aggressively seeking new business by offering incentives, such as frequent flyer miles and discounts on autos.

They also note that consumers now have more ways of using credit cards, such as buying groceries at the local store, rather than using available cash.

Separately, the Commerce Department reported that U.S. businesses plan to spend a revised 8.8% more on plant and equipment this year compared to last year, previously reported up 8.3%. This would be the biggest advance in five years.

This anticipated gain would put total capital spending at $638 billion this year, compared with $587 billion in 1993.

Business investment has been one of the strongest segments of the economy in recent quarters. Yesterday's report provided another indication that the trend would continue at least through the end of this year, economists said.

"Capital spending will stay strong during the second half of this year but then it may moderate as growth in the economy slows," said Christine Chmura, chief economist of Crestar Bank in Richmond, Va.

However, Russell Sheldon, senior economist at Mellon Bank, said the boom in plant and equipment spending "is just getting started" because heavy industry is not inclined to build new plants until existing capacity is stretched thin, which is currently the case.

In fact, yesterday's report said durable goods makers plan to increase their capital spending by 13.9% this year over last. "Large increases are planned in blast furnaces, motor vehicles, stone-clay-glass, electrical machinery, and other durables," the report said.

Manufacturing industries as a whole plan to raise capital spending by 7.3% this year, compared with a 3.1% gain last year.

Strong capital spending contributes to a low-inflation environment because new machines and plants lead to higher levels of productivity and available capacity in the economy, analysts say.

"It's good news on the inflation front," Chmura said.

However, Sheldon said the connection between capital spending and inflation is very weak regarding the immediate future. "It's a long-term link, easily violated in the short run," he said.

The Labor Department also reported yesterday that initial unemployment claims fell 3,000 to 330,000 in the week ended Sept. 3. However, the four-week moving average rose by more than 1,000 to 326,500.


Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.