Household debt shrank at an annual rate of -0.8 percent for the third quarter 2008, compared with the 0.6 percent annual growth in household debt seen just one quarter before. Federal debt, however, attempting to counter the failing financial market and bleeding job market, spiked over last year in the third quarter. It had only seen a moderate 5.9 percent yearly growth the previous quarter, the Federal Reserve announced Thursday in its quarterly statistical release. "State and local government debt increased at an annual rate of 3 percent in the third quarter, about 2 percentage points faster than in the previous quarter," the Fed wrote in a summary of the report. "Federal government debt surged at an annual rate of 39.2 percent in the third quarter, the largest quarterly growth rate recorded in the flow of funds accounts." While big brother's balance sheets swelled with the Fed's attempts to bolster financial markets -- including a commercial paper funding facility -- household debt declined at an annual rate of -0.75 percent in the third quarter, after having posted a small increase in the previous quarter, suggesting consumers spent more resources trying to get their arms around debt as the economy contracted. In the third quarter, home mortgage debt decreased at an annual rate of -2.5 percent, and consumer credit rose only at an annual rate of 1.2 percent, according to the Fed's data. Consumers are spending cautiously and borrowers have apparently made paying down mortgage debt a priority in the third quarter. Household net worth — assets minus liabilities — was down $2.8 trillion from the second quarter, coming in at an estimated $56.5 trillion at the end of the third quarter 2008. This was even after borrowers managed to pay off $327.5 billion in residential mortgage debt for the quarter, bringing down total U.S. home mortgage liabilities -- mortgage balances outstanding -- to $10.57 trillion from $10.61 trillion in the second quarter. Borrowers had only paid down $65.2 billion in the second quarter 2008, which marked a stark reversal of the previous upward trend seen in the first quarter 2008, when outstanding mortgage debt saw a $270.3 billion net growth. In 2005, at the height of the boom, the Fed reported a $1.12 trillion net growth in home mortgage. The loss in household net growth may be frightening, especially in light reports out of the U.S. Labor Department that initial jobless claims jumped 58,000 last week to a 26-year high of 573,000 so far for 2008. The bloodletting in the job market continues, as does the shrinking of the economy. But sometime during the third quarter 2008, the American consumer made mortgage repayment a priority and managed to pay down an unprecedented amount of debt. It's unclear now whether the trend has continued into the fourth quarter. Write to Diana Golobay at diana.golobay@housingwire.com.