U.S. Household Worth Fell by $1.3 Trillion in First Quarter

June 11 (Bloomberg) -- U.S. household wealth fell in the first quarter by $1.3 trillion as home and stock prices dropped, extending the biggest slump on record.

Net worth for households and non-profit groups decreased to $50.4 trillion from $51.7 trillion in the fourth quarter, according to the Federal Reserve’s Flow of Funds report today. The government began keeping quarterly records in 1952.

Americans are cutting back on spending as unemployment surges, home prices continue to drop and wealth evaporates, signaling any economic recovery will be slow to develop. The drop in net worth is one reason Americans are boosting savings, blunting the effect of the tax breaks and income supplements from the Obama administration’s stimulus plan.

“This great recession has left a fundamental stamp on consumer psychology,” Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said before the report. “Increasing savings, planning on working a little bit longer, more conservative investments, more conservative everything. Even if confidence comes back, I don’t think it will translate into spending like it would have” in the past.

Retail sales rose in May for the first time in three months, an increase driven almost solely by U.S. shoppers returning to automobile showrooms seeking bargains and the rising cost of gasoline, a report today from the Commerce Department showed.

One positive aspect of today’s Fed report is that the decreases in net worth are starting to ease. Wealth dropped by a record $4.9 trillion in the last three months of 2008.

More Saving

Americans have taken on less debt as the economic recession unfolds. While the jump in savings rate to 5.7 percent in April was helped by an increase in incomes linked to the fiscal stimulus plan, some economists are forecasting savings will continue to rise as consumers hold back on spending.

Real-estate-related household assets decreased by $551.1 billion, following a $974.5 billion decrease in the fourth quarter. Net worth related to corporate equities fell by $347.8 billion the first three months of this year.

Owners’ equity as a share of their total real-estate holdings decreased to 41.4 percent last quarter from 42.9 percent in the fourth quarter, today’s Fed report showed.

Consumer debt fell at a 1.1 percent annual pace following a 2 percent decrease in the fourth quarter that was the first drop on record.

Mortgage borrowing was unchanged from January through March, the first time in a year it didn’t fall, the Fed’s report showed.

Federal Borrowing

Total borrowing by consumers, businesses and government agencies increased at an annual rate of 4.1 percent last quarter compared with a 6.2 percent gain the prior quarter. The gain was paced by a 23 percent surge in borrowing by the federal government, reflecting spending linked to the stimulus plan.

Business borrowing decreased at a 0.3 percent pace after rising 1.5 percent the prior quarter, the Fed said.

Borrowing by state and local governments increased at a 4.9 percent rate.

The economy contracted at a 5.7 percent annual pace in the first quarter and consumer spending rose at a 1.5 percent pace.

Economists surveyed by Bloomberg News this month forecast unemployment will climb to 10 percent by the end of the year and lowered their projections for consumer spending in the second half of the year to an average 1.1 percent annual pace. For all of 2009, purchases will drop 0.7 percent, the worst performance since 1974, according to the Bloomberg survey.

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