US economy slowing but not slumping

US consumers remain confident, despite talk of an economic downturn

A swathe of new data showed that the American economy is slowing down, but not dangerously so.

US wholesale prices fell at their sharpest rate in more than two years in June, easing pressure on inflation.

In the same month, retail sales grew by a modest 0.2%, their second successive month of sluggish growth.

Fears of an out-and-out recession were soothed, however, by the closely watched University of Michigan consumer survey, which showed that US shoppers were keeping their spirits up.

As expected, the overall picture is of a gentle deceleration in the US economy.

Although this should please observers, who had been hoping for a so-called "soft landing" after many years of boom, President George W Bush is still concerned over the state of the economy, his spokesman said.

The data is likely to sput action on the government's plans for a $1.35 trillion tax cut package.

Producing more cheaply

The US Producer Price Index, a gauge of wholesale inflation, slid 0.4% last month after a slim 0.1% gain the month before, the Labor Department said.

Industrial prices are easing

The drop was led by falling energy prices and marked the biggest decline since a 0.5% decrease in February 1999.

Analysts had been expecting that inflation would moderate after steep increases earlier this year reflecting a big jump in energy prices.

They also said the sharp slowdown in economic activity was helping to ease inflationary pressures as wage demands soften with the rising jobless rate.

This softer trend was mirrored by the retail sales data, which showed that growth in June was less than the markets had predicted.

Shoppers stay chipper

Crucially, however, American consumers remain confident.

Bush: 'Concerned' about the state of the economy

The University of Michigan's preliminary July consumer sentiment index pushed up to 93.7 from 92.6 in June, extending a gradual rebound from a floor of 90.6 in February, its lowest level in nearly five years.

The expectations index, a gauge of attitudes about the coming year, rose to 89.5 after jumping to 86.9 in June.

But the current conditions index, an assessment of how consumers gauge their present financial fortunes, fell to 100.2 from 101.6 in June.

Worries remain

The economic news may be broadly positive, but US financial markets remain preoccupied with corporate performance.

And the news here has been bad.

A series of old-economy stalwarts issued profit warnings on Friday, including toy retailer Toys R Us, and personal care products manufacturer Kimberly Clark.

These warnings are being seen as concrete evidence that reported consumer confidence may prove illusory.

And markets were spooked by the news that rate of defaults on junk bonds - issued by firms with below-par credit histories - soared to 10% over the last 12 months.

The figures, calculated by credit rating agency Fitch, show the highest default rate since the early 1990s, the last time the US economy was in recession.