September 16, 2011 / 4:06 PM / in 6 years

Household debt burden eases in second quarter

WASHINGTON (Reuters) - The level of U.S. household debt compared with after-tax income fell in the second quarter to the lowest level since 2004, according to data on Friday, a trend that could lay the groundwork for greater consumer spending.

A Federal Reserve report showed that household mortgage debt fell while after-tax income rose in the second quarter. But consumer credit, which accounts for a smaller portion of household balance sheets, rose.

Household debt was 114.6 percent of disposable income during the April-June period, down from 116 percent in the previous quarter, according to Reuters’ calculations based on the Fed’s “Flow of Funds” report.

It was the lowest level for that ratio since the second quarter of 2004, and down from the record high of 130 percent hit in 2007, as America’s housing bubble unraveled and the country sank into a deep recession.

“Basically households have gotten into a better position to sustain spending if there are job and income gains,” said Joseph Carson, an economist at AllianceBernstein in New York.

While progress is being made bringing debt ratios down to more manageable levels, family debt burdens remain historically high. In data going back to just after World War Two, it is only since 2002 that household debt has exceeded after-tax income.

The decline in the debt ratio in the second quarter reflected a 1 percent rise in disposable income during the quarter and a drop in mortgage debt of 2.4 percent, the data showed. Consumer credit rose by 3.4 percent.

Household debts shrank at a 0.6 percent annual rate during the second quarter. That was the smallest decline since families started steadily shedding debt in the third quarter of 2008.

Still, total household wealth fell by $149 billion during the period. That could make consumers less willing to open their wallets as they fret about personal finances. The decline in total housing wealth dragged down household net worth to $58.5 trillion, well below its peak of $64.3 trillion at the end of 2006, the Fed figures show.

The report also showed nonfinancial corporate businesses held a record-high $2.05 trillion in liquid assets, such as cash, in the second quarter, up from $1.96 trillion in the previous quarter.

The hoarding of cash shows businesses remained leery about the future.

Reporting by Jason Lange; Editing by Leslie Adler

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