Household Debt Almost Equals U.S. GDP

NEW YORK (MainStreet) -- While the U.S. economic outlook is showing some scant signs of progress, the carnage left over from the financial downturn looks downright depression-like – and particularly depressing to U.S. households.

A new report from the Federal Reserve shows that American households are now sitting on $13.2 trillion in debt, and household net worth – defined as the difference between assets and liabilities – was down a staggering $2.4 trillion from the previous quarter.

Fed analysts say the decline in net worth was attributable to a decline in the value of financial assets, which fell 5.2% in the third quarter. A fractional drop in U.S. home values (0.6%) contributed as well. Total U.S. home values slid to $16.1 trillion, down from approximately $21 trillion in 2007, just as the recession began to generate some steam.

Monitoring household debt is akin to watching a train wreck in slow motion. The $13.2 trillion beats the $13.1 trillion in total government debt, or the $11.5 trillion in debt racked up by non-financial businesses in the U.S., the Fed reports.

In plain language, U.S. households are deeper in debt than U.S. businesses and – stop the presses – the much-maligned federal government.

Viewed through another prism, the $13 trillion consumer debt figure almost reaches the total GDP of the U.S., $15 trillion. And losing that $2.4 trillion in Q3 is similar to losing about 16% of total GDP, which would be considered a catastrophic depression in economic circles.

The trend in lost net income most likely started in 2007, when household net worth crested at $66.8 billion. But four years later, that figure has plunged to $57.4 trillion, the Fed reports.

So what’s to blame? Americans certainly aren’t making more money on the job, analysts say, and the drop in household income has caused families to raid their bank accounts and credit cards to pay for goods and services. But that trend may dissipate in the last quarter of 2011.

Gregory Daco, chief U.S. economist for IHS Global Insight, says as much.

"IHS expects a strong fourth quarter rebound in household net worth resulting mostly from a rally in stock prices," he wrote in a Dec. 7 research note. "This should provide some support to consumer spending as employment growth continues to make progress and consumers cheer up ahead of the holidays."

If consumers are really cheering over $2.4 trillion in lost household net worth, then someone better put down the eggnog.

The Great Recession, which in hindsight may have been closer to another Great Depression, has inflicted a world of hurt on U.S. households. And that pain is going to take some time to recover from.