Is household debt still holding back the economy?

Higher consumer demand is critical to jump-starting the economy. But Americans won’t be inclined to spend and borrow more until they’ve pulled themselves out of the quagmire of debt left in the wake of the 2008 meltdown. Household debt has to come down before the economy can recover. The latest data from the Federal Reserve Bank of New York show modest signs of healing from U.S. households, which are still unwinding their debt but may be slightly more inclined to spend again. The N.Y. Fed’s report also makes it clear, however, that parts of the country are still underwater, and the mortgage crisis is still a drag.

Nationwide, household debt excluding real estate fell 0.4 percent in the last quarter, and mortgage and home-equity balances both fell. The pace of consumer debt reduction has slowed as compared to the previous nine quarters, but some are interpreting this as a sign that consumers have managed to unwind many of their most toxic assets. “This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed,” Andrew Haughwout, vice president of the N.Y. Fed’s research and statistics group, said in a statement. In fact, delinquency rates fell slightly, and new foreclosures were also down more than 20 percent from the first quarter. There were also small improvements on the demand side: Open credit card accounts rose by 10 million, and credit card limits rose by 2.1 percent, showing banks may be more willing to lend.

(FEDERAL RESERVE BANK OF NEW YORK)

But the Fed’s data also suggest that the housing crisis is still holding big parts of the country back. Many of the states where the mortgage meltdown hit hardest have the highest debt balance per capita, and they’re the most delinquent when it comes to mortgage payments and overall debt payments.

So households in California and Nevada are awash in sky-high consumer debt. Florida, whose per capita debt load is closer to the national average, has an outsize number of severely delinquent payments. By contrast, states such as Texas that were largely sheltered from the housing bubble and its accompanied meltdown have far less debt per capita. In fact, many of the states with the highest debt balance per capita also have the most delinquent mortgage payments. Here’s a graphic from the N.Y. Fed showing the current mortgage delinquency rate of 90+ days across the country:

(FEDERAL RESERVE BANK OF NEW YORK)

In recent weeks, President Obama has vowed to address these lingering problems in the consumer housing market. Until these underlying problems in housing finance are resolved, toxic debt could to keep U.S . households — and the economy — from fully recovering.