U.S. households shed debt and grew their collective wealth by $943 billion in the first quarter, laying the groundwork for stronger consumer spending that could allay fears of a prolonged economic soft patch.
Household debt shrank 2% to its lowest level since the first quarter of 2007, and now exceeds disposable income by just 14%, data released Thursday by the Federal Reserve showed. That's down from the pre-housing crash peak, when household debt exceeded disposable income by some 30%.
But sagging real estate values continued to weigh on households struggling to repair their battered finances after the collapse of the housing market. The decline in debt stemmed largely from a sharp 3.4% drop in mortgages.
"While some of this household deleveraging is voluntary, a big part of the story in the mortgage space is foreclosure activity," Credit Suisse economist Dana Saporta wrote in a note to investors.
A pullback in consumer spending put the brakes on U.S. economic growth in the first quarter, and since then a slowdown in manufacturing and job growth has raised concerns about the strength of the recovery.
Veteran economist Robert Shiller said Thursday that home prices could fall further, sucking more steam from the economy and tipping it into a renewed recession.
Gains from stocks and other investments boosted household net worth to $58.1 trillion, the Federal Reserve data showed, but the gains were tempered by a decline in real estate holdings to the lowest level since the fourth quarter of 2003.
The first-quarter gain in net worth was less than half the revised $2.4-trillion surge in the fourth quarter, when stocks rose faster and housing held up better, the report showed.
Household wealth is still well below its peak of $64.2 trillion at the end of 2007, before the housing market collapsed.
Businesses, meanwhile, increased borrowing by 4% but also stuffed cash coffers to a record $1.91 trillion, suggesting they have plenty of cash to step up investments.
The government's debt expanded 7.8% at an annual rate in the first quarter, down from 14.6% in the previous quarter.
State and local government debt contracted for the first time since the second quarter of 2010, dropping 2.9% on an annual basis after expanding 7.9% in the previous quarter.