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Rise in household debt hints at end of deleveraging

A vacant, boarded up house is seen in the once thriving Brush Park neighborhood with the downtown Detroit skyline behind it in Detroit, Mich
A vacant, boarded up house is seen in the once thriving Brush Park neighborhood with the downtown Detroit skyline behind it in Detroit, Mich

By Alister Bull

WASHINGTON (Reuters) - Household debt grew at its fastest pace since early 2008 in the fourth quarter of last year, a possible sign that the painful process of paring back borrowing in the aftermath of the financial crisis may have run its course.

Household debt rose at a 2.5 percent annual rate in the fourth quarter, the Federal Reserve said on Thursday in its quarterly Flow of Funds report. It was the steepest gain since the first quarter of 2008 and only the third quarter since then in which debt levels rose.

The data showed that the net worth of American households grew solidly during the fourth quarter of 2012, rising $1.1 trillion to $66.0 trillion, another hopeful sign for future U.S. consumer spending.

The United States is slowly recovering from a severe recession sparked by the crisis. Growth remains tepid and unemployment in January was a lofty 7.9 percent, but the Fed has taken aggressive steps to spur spending, investment and hiring.

Home mortgage debt shrank by 0.75 percent in the fourth quarter, while consumer debt rose at an annualized 6.5 percent pace, evidence of growing confidence among households.

The Fed has held interest rates near zero since late 2008 and has tripled the size of its balance sheet to around $3 trillion to support growth, underwriting a recovery in housing and a rally that has driven U.S. stocks <.SPX> <.DJI> to record highs.

Critics warn it is fueling the next asset bubble and risking future inflation. But the Fed says it has these risks under control and has pledged to maintain its extraordinary measures until it sees a substantial improvement in the outlook for the labor market.

The U.S. central bank said the increase in Americans' net wealth in the fourth quarter was aided by a $480 billion gain in the value of real estate and a $130 billion advance in the value of household stock portfolios.

The Fed's easing of monetary policy has also been aimed at persuading businesses to invest and hire more. But the data showed that the level of liquid assets held by non-financial companies grew to $1.79 trillion in the fourth quarter from $1.77 trillion in the previous three months.

Business advocates say that investment will pick up as the economic climate improves, but also complain that uncertainty being created by budget battles in Washington has encouraged corporations to keep more cash on hand.

(Reporting by Alister Bull; Editing by Chizu Nomiyama, Tim Ahmann and James Dalgleish)

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