NEW YORK (CNNMoney.com) -- It's a sign of the times: Americans are pulling back on the debt they use to spend and fuel the economy, while their net worth is declining.

The government reported Thursday that household debt in the third quarter fell for the first time ever. Meanwhile, net worth dropped by the largest amount on record based on data going back to 1951.

Household debt fell by a seasonally adjusted $30 billion, or an annualized 0.8% in the third quarter to $13.91 trillion, according to the Federal Reserve's flow of funds report.

Americans holding less debt may sound like a positive, but it also means consumers are spending less, as debt has become more expensive and harder to come by.

"Interest rates have shot rapidly higher in the last few months, and people are borrowing less because they don't want expensive credit hanging over their heads," said Michael Englund, chief economist for Action Economics. "The other component is the credit crunch, where qualified borrowers are unable to get credit."

Debt mainly fell because more than a million Americans have lost their homes to foreclosure since the housing crisis hit in August 2007. When a home is foreclosed upon, the debt is transferred away from the homeowner to the bank. As a result, home mortgage debt sank a whopping 2.4% in the quarter.

As the credit crunch intensified in the third quarter - and exploded late in the period with the bankruptcy of Lehman Brothers - Americans were increasingly unable to finance big purchases like homes, cars and big-ticket goods. Accordingly, consumer credit rose by a measly 1.2% in the quarter, the lowest seasonally adjusted rise of that measure since the second quarter of 1992.

Automobile purchases have been sinking all year, but began to fall sharply in the third quarter as the credit tightened. Auto dealers across the country have reported that many consumers are interested in buying cars but cannot acquire the financing to purchase them.

Furthermore, the U.S. economy has shed 1.9 million jobs so far in 2008, with precipitous declines since September. As a result, the economy has entered a vicious cycle, in which Americans spend less and have less to spend.

"Today's announcement shows us that American households are pulling back on spending in the face of strong headwinds in the job market, and it highlights the reduced willingness of a still-stretched financial sector to extend credit," said Economic Policy Institute economist Josh Bivens in a statement. "Neither tells us anything good about the kind of economic growth we can expect over the next year."

That's a worrisome sign for the economy, as consumer spending makes up 70% of overall U.S. gross domestic product. The economy entered a long and deep recession in December 2007, and the prospect of a turnaround will weigh heavily on consumers' confidence to spend money.

"Everyone over the past three months decided to become thrifty at the same time, but our incomes depend on other people spending," said Englund. "If we all start saving and cut back on our spending at the same time, it means more people will ultimately get fired."

And fourth-quarter debt data is likely to be even lower, as the peak of the credit crisis came in mid-October.

"There has been a particularly steep rise in the savings rate recently," said Englund. "With a large part of thriftiness due to panic, this trend could continue for a long time."

Net worth in 12-month tailspin

Consumers watched their net worth fall for the fourth quarter in a row as it dropped by $2.8 trillion, or 4.7%, to $56.5 trillion, dragged down by huge drops in home values and in the stock market. It was the largest decline in the 57-year history of the report.

Americans' wealth also sank $393 billion in the second quarter, $2.4 trillion in the first quarter and $1.5 trillion in the fourth quarter of 2007. Until then, net worth had been rising steadily since 2003, climbing nearly 31% over those five years.

The four straight quarters of declines have resulted in a net 11.1% drop in Americans' wealth in the last 12 months. During the bear market of 2000 through 2002, household's net worth dropped just 6.2%.

The net value of financial assets for households fell by $2.1 trillion, or 4.4%, led mainly by falling values of stock holdings and mutual funds.

Americans' share of corporate equities plummeted $943.5 billion - an 11.5% drop - in the quarter, to $7.3 trillion. With major stock indexes like the S&P 500 falling 40% or more since January, shares of mutual funds, a primary investment of 401(k) retirement funds, declined $597.4 billion, or 12.4%, to $4.2 trillion.

Financial assets account for about two-thirds of households' net worth, but consumers have also been hit hard by sinking home prices. Home values fell by $347 billion in the quarter to $19.1 trillion.

"Consumers are going through a major change in their spending and savings habits," said Lyle Gramley, a former Fed Governor. "Throughout the housing bubble, consumers had a savings rate of zero, relying on the rising price of their homes. Now they're saving money for the future instead of spending it."