July 21 (Bloomberg) -- 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 as the Treasury sells a record $2 trillion of bonds and rising unemployment increases U.S. savings.

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

“We’ve never seen a pullback like this,” Goldman’s chief U.S. economist, Jan Hatzius, said in an interview from his New York office. “We are seeing an adjustment, and it’s very painful and there’s a lot of collateral damage.”

The 0.7 percent contraction in debt among households and nonfinancial companies from January through March was the first since 1952, when Truman was president and the government began keeping the records, Hatzius said.

Banks Buying Treasuries

Consumer credit fell at an annual 1.6 percent rate in May to $2.52 trillion, according to the Federal Reserve. Reduced spending may slow the recovery from the first global recession since World War II because U.S. households generate 17 percent of global gross domestic product, according to Sara Johnson, a managing director at IHS Global Insight in Lexington, Massachusetts.

At the same time, rising unemployment helped lift the U.S. savings rate to 6.9 percent 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.

Bank holdings of Treasuries and debt of mortgage companies Fannie Mae of Washington and McLean, Virginia-based Freddie Mac totaled $1.33 trillion in the week ended July 8, up 16 percent from a year earlier, according to the Fed.

Treasury benchmark 3.125 percent notes due in May 2019 yielded 3.61 percent July 20. That was just under the 3.72 percent weighted average year-end forecast of 63 analysts surveyed by Bloomberg and 2 percentage points below the 5.64 percent average rate of the past 20 years.

$1.1 Trillion More

“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 on a conference call with investors July 16.

The U.S. will sell $1.1 trillion of Treasuries by the end of the year, on top of the first half’s $963 billion, Barclays Plc estimates.

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

About 190 U.S. companies, including Dearborn, Michigan- based automaker Ford Motor Co. and Las Vegas casino owner MGM Mirage, raised a record $91 billion in secondary share sales from April through June, according to Bloomberg data. As of mid- June, proceeds from about three-quarters of these sales were used to pay back bonds and loans, the data show.

Of the record $774 billion in corporate-bond offerings this year, about 75 percent were used to refinance existing borrowings, according to Bloomberg data and John Lonski, chief economist at Moody’s Capital Markets Group.

‘Debt Rehab’

Palo Alto, California-based Hewlett-Packard Co., the world’s largest personal-computer maker, and Memphis, Tennessee-based International Paper Co., the biggest manufacturer of office paper and cardboard shipping boxes, both issued bonds in May to repay debt.

“Corporate America is going through debt rehab,” said Lonski, who’s based in New York. “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 percent, a level not seen in 26 years, according to the Labor Department.

No New Jeans

“You are not going to buy a new pair of jeans if you don’t have a job yet,” Blake Jorgensen, chief financial officer of Levi Strauss & Co., said in a phone interview from San Francisco. The jeans maker reported a second-quarter loss of $4.13 million on July 14, compared with a year-earlier profit of $701,000.

Retrenchment by consumers puts the U.S. economy on pace to grow at an annual average of “closer to 2 as opposed to 3 1/2 percent” for a generation or more, Bill Gross, co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, said in his July commentary posted on the firm’s Web site.

“There has been a big change in the private sector, and that’s fine,” Fed Chairman Ben S. Bernanke said today in semi- annual testimony before the House Financial Services Committee “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 said.

While U.S. savings rise, companies are enduring increasing levels of pain.

Avoiding Motorcycles

Consumers “understand what they are spending more than ever,” Mike Duke, chief executive officer of Wal-Mart Stores Inc., told employees and suppliers July 16 in Bentonville, Arkansas, where the world’s largest retailer is based. “This has brought on a new normal of how consumers view consuming, shopping.”

Frugal motorcycle shoppers are avoiding taking on debt to purchase bikes such as the Road King touring model, which costs as much as $40,000 when customized, from Harley-Davidson Inc.

The biggest U.S. motorcycle maker’s finance arm said July 16 that loans fell 33 percent in the second quarter to $700 million.

“Sales of Harley-Davidson motorcycles at retail in the U.S. declined significantly in the second quarter, with the backdrop of unemployment at 25-year highs and consumer confidence at near-record lows,” the Milwaukee-based company’s CEO, Keith Wandell, who rides a Road King, said on a conference call.

‘Clear Tradeoff’

As Americans save more and borrow less, the U.S. will have to rely on “international growth to drive our growth,” Citigroup Inc. CEO Vikram Pandit said in prepared remarks for a June 15 speech in Detroit.

“There is a clear tradeoff between saving more and stimulating the economy in the short term to achieve stability,” Pandit said. “The world needs different drivers of growth away from the U.S. consumer and credit markets.”

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

A second stimulus package focusing on infrastructure projects should be considered because the first one was “a bit too small,” Tyson said this month.

‘Too Early’

It’s “too early” to tell whether the current plan is working and the country should be open to more spending, House Majority Leader Steny Hoyer, a Maryland Democrat, said July 7.

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

“He hasn’t ruled anything in; he hasn’t ruled anything out,” White House press secretary Robert Gibbs said July 16. “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 U.S. lost a greater-than-expected 467,000 jobs last month, and Vice President Joe Biden said July 5 the administration “misread the economy” when it predicted unemployment would peak at 8 percent once the stimulus package was passed. On July 14, Obama said the jobless rate will “tick up” over the next several months.

‘Getting Started’

“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.’

Slower U.S. growth may benefit the world economy by reducing trade imbalances and strengthening America’s financial position, said Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

The U.S. current-account deficit, which reached a record 6.3 percent of GDP in the third quarter of 2006, has shrunk to 4.5 percent as savings climbed.

‘‘It’s a good thing to raise our savings rate here in the U.S.,” Bryson said. “The large current account deficits in the U.S. are an accident waiting to happen. If we start to rebalance the world economy, the probability of future train wrecks starts to come down as well.”

‘Inopportune Time’

The de-leveraging of the U.S. economy comes at “an inopportune time,” said Martin Fridson, who joined with BNP Paribas Investment Partners to found Fridson Investment Advisors in New York last year.

“It’s a change that’s got to occur, but it absolutely slows down the potential for recovery,” said Fridson.

Consumers’ debt pullback is only now getting under way, said Simon Johnson, a professor at the Massachusetts Institute of Technology in Cambridge and former chief economist at the Washington-based IMF.

The rise in savings so far is largely a product of mortgages being extinguished by home foreclosures, government tax cuts and transfer payments under the stimulus package, he said.

“As there’s an adjustment to higher savings, then there is a potential paradox of thrift,” Johnson said, referring to economist John Maynard Keynes’s theory that increased saving is good for individuals but bad for society as a whole because it reduces demand.

“To some extent, the government can offset that” with fiscal stimulus, he said. “At some point you have to worry about the budget deficit.”

$15 Trillion Collapse

The shortfall for the fiscal year that began Oct. 1 totaled $1.1 trillion as of June 30, the first time the gap for this period surpassed $1 trillion, Treasury figures show.

After suffering a collapse in wealth of at least $15 trillion since early 2007, American consumers are leading the U.S. economy into a “new normal” of higher savings rates and lower consumption, according to Pimco’s Gross, who manages the world’s biggest bond fund.

“‘Non Appetit,’ not Bon Appetit, will become the apt description for the American consumer and significant parts of the global economy, including the U.S.,” Gross wrote in the July commentary.

Consumers are drinking more tap water, hurting demand for vegetable juices made by Camden, New Jersey-based Campbell Soup Co.,Sean Connolly, president of the U.S. division, told analysts July 15 at a soup factory in Maxton, North Carolina.

“Unfortunately our vegetable-juice business has slowed this year along with the rest of the shelf-stable juice category due to the economic downturn,” he said.

“We definitely have a paradox of thrift going on,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “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.”

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Michael McKee in New York at mmckee@bloomberg.net

Last Updated: July 21, 2009 12:59 EDT