Businesses, consumers and the government continued to add to their debt load at a rapid pace in the third quarter, despite the sharp slowdown in economic growth.
The Federal Reserve Board reported yesterday that nonfinancial debt grew at an annual rate of 11.7 percent in the third quarter -- with federal debt growing at a 14.7 percent rate and private debt at a 10.8 percent pace. Nonfinancial debt grew at a 13.2 percent rate in the second quarter.
William Sullivan, chief money market economist for the securities firm Dean Witter Reynolds, said the continuing large rise in debt could presage a sharp increase in interest rates if the economy regains momentum.
Many analysts think that the recent decline in interest rates may spark an upsurge in economic activity. After expanding rapidly in the first half of the year, economic growth slowed to a 1.9 percent rate in the third quarter. The Federal Reserve has been easing monetary policy in recent months, in large part, analysts said, to reinvigorate the economy and keep the slowdown in growth from turning into a recession.
Since early September, short-term interest rates have tumbled 2 percentage points or more. To foster further interest rate reductions, the Federal Reserve cut its discount rate Wednesday from 9 percent to 8 1/2 percent.
Dean Witter's Sullivan said the continued sharp increase in credit demand at a time when the economy is slowing -- and presumably should demand less credit -- could create a sharp clash between government credit demands and private-sector borrowing in the future.
The 11.7 percent growth in nonfinancial debt -- the figure excludes borrowings by financial institutions such as banks -- is slower than the 13.2 percent rate at which debt grew in the second quarter and the 12.6 percent rate in the first quarter.
But the slowing in debt growth was tiny compared to the slowdown in economic activity. The Federal Open Market Committee, the policy-setting arm of the Federal Reserve Board, has set what it calls a "monitoring range" of between 8 percent and 11 percent for nonfinancial-debt growth in the third quarter. The committee does not set a target for the growth of nonfinancial debt, but instead hopes that it grows within that range as a result of the actions the Fed takes to influence other targets such as the growth of the money supply.
The continuing strong growth in nonfinancial debt reflects in part the large federal deficit -- which forces the Treasury to borrow to pay government bills. But businesses, which have seen their internal sources of cash -- such as retained earnings and depreciation -- begin to dry up have turned to the credit markets to replace those funds.
Businesses, however, did show the effects of the slowdown in growth. They increased their borrowing at a 9.9 percent rate in the third quarter, compared with a 15 percent rate in the second quarter.
Households borrowed at a 12.1 percent rate in the third quarter, compared with a 13.5 percent rate in the second quarter.