For the first time since Harry S Truman was in the White House, Americans are paying back their debts, a phenomenon that just might help keep interest rates low. Furthermore, the US Treasury has sold a record $2trn worth of bonds and savings have increased in the US amid rising unemployment.

While the proportion of consumers without jobs rose to 9.5% last month, household borrowing fell to 128% of the average family's after-tax income in the first quarter, from a record 133% a year earlier, according to data compiled by Bloomberg. The total debt of individuals, non-financial companies and federal, state and local governments grew at a 4.3% pace at the start of the year, down from a peak of 9.9% in the fourth quarter of 2005, Goldman Sachs estimated.

"We've never seen a pullback like this," Goldman's chief US economist, Jan Hatzius, said. "We are seeing an adjustment, and it's very painful and there's a lot of collateral damage."

Consumer credit fell at an annual 1.6% rate in May to $2.52trn, according to the US Federal Reserve.

Reduced spending may slow the recovery from the first global recession since World War II because US households generate 17% of global gross domestic product, according to Sara Johnson, a managing director at IHS Global Insight.

At the same time, rising unemployment helped lift the US savings rate to 6.9% in May, the highest since December 1993. That's keeping Treasury yields in check because banks are pumping deposits into the bond market instead of making new loans.

"The levels of cash on bank balance sheets will keep government-bond yields lower," Robert McAdie, global co-head of credit strategy Barclays Capital in London, said earlier this month.

While the Treasury steps up borrowing, corporations are rushing to lower indebtedness.

"Corporate America is going through debt rehab," said John Lonski, chief economist at Moody's Capital Markets. "The focus right now is on improving financial health and that probably will be at the expense of capital spending and hiring activity. Nothing will discourage capital spending or encourage cutbacks in staff more than much lower-than-expected sales."

The job reductions are pushing unemployment near 10%, a level not seen in 26 years, according to the US Labor Department.

"You are not going to buy a new pair of jeans if you don't have a job yet," said Blake Jorgensen, chief financial officer of Levi Strauss. The jeans maker reported a second-quarter loss of $4.13m on 14 July, compared with a profit last year of $701,000.

"There has been a big change in the private sector, and that's fine," Federal Reserve chairman Ben Bernanke said on Friday. "It creates problems in the macro economy, because without consumer spending, the economy doesn't grow as fast."

People "need to get their balance sheets in order and their budgets in order", Bernanke added.

Consumers "understand what they are spending more than ever", Mike Duke, chief executive officer of Wal-Mart Stores, told employees and suppliers earlier this month.

The longest recession since the 1930s should move President Barack Obama to increase spending on top of the $787bn stimulus package enacted by Congress, said Laura Tyson, an outside adviser to the president.

Government officials say it's premature to discuss a second infrastructural stimulus, since most of the initial measure's effects won't kick in until late this year and in 2010.

"He [Obama] hasn't ruled anything in; he hasn't ruled anything out," White House press secretary Robert Gibbs said earlier this month. "If there are things that can be done to help spur the economy back to recovery faster, they'll certainly be considered by them and the whole team."

The US lost a greater-than-expected 467,000 jobs last month, and vice-president Joe Biden said recently that the government had "misread the economy" when it predicted unemployment would peak at 8% once the stimulus package was passed.

Earlier this month Obama said the jobless rate will "tick up" over the next several months.

"If you look at various measures of debt in the system, they suggest what we're doing is getting started on this adjustment; we still have several years to go," Goldman's Hatzius said.

"We're going to be at saving levels that are much, much higher than they were in 2006 and, in many cases, permanently."

"We definitely have a paradox of thrift going on," said Joseph LaVorgna, chief US economist at Deutsche Bank Securities. "If everyone rushes for the exit at the same time, it's hard to get out. If everyone is de-leveraging at the same time, it's hard to get the economy going." bloomberg

Frank Lee is away