False starts for US economy optimism

Shoppers are showing a keener eye for a bargain

		By Stephen Evans North America business correspondent

It is hard to know why they call economics the "gloomy science".

In the United States, economists have been seeing light at the end of the tunnel for the past six months.

Each time, the gleam has been a mirage: Strong growth would resume in the second half of this year; then in the final quarter of this year; now it is next spring or summer.

In fairness, they cannot be blamed for their eternal optimism.

Things looking up

September 11 intervened to turn previous calculations upside-down.

And now, some evidence, if not of recovery then of a halt to the recession, is there.

Spending on durable goods is strong. Spending on houses and cars is also rising. Stocks of unsold goods are falling, and that is a pre-condition for companies to pick up production.

Moreover, usually reliable measures of consumer confidence have not shown any significant worsening after the fall prompted by the attacks on the World Trade Centre and the Pentagon.

Consumers are still spending

And on the best test (what are consumers actually doing with their money?), the answer is positive:

They are spending it; not quite like they were, but spending nonetheless.

Overall consumer spending may actually rise during the last three months of the year.

On top of the figures, the reasoning of the optimists in the gloomy science is that, since the recession started in the spring, the economy should now be well into it.

Since the Second World War, recessions have lasted between 6 and 18 months, so the current one would have to be the longest in the last 50 years for recovery to be delayed beyond next summer.

On top of that, the resumption of growth ought to be helped by the new administration's tax cuts.

Will optimism last?

But there are imponderables.

Unemployment continues to rise. It is now at its highest rate for 6 years, and the fear must be that as lay-offs continue, consumers get less optimistic about the future and start holding back more on their spending - all sending companies into a further round of cut-backs.

The stock market rallied, taking the Dow Jones Industrial Average back above 10,000, but there is no definite sentiment that bears have turned back into bulls - or in layman terms; that the pessimists are turning optimistic.

Further falls in the market, say as companies report lower profits, might also feed through into consumer spending.

The most likely outcome is that the economy will stop shrinking towards next spring, but the recovery thereafter will not be strong.

We are not going back to the phenomenal growth of the late 90s.

Companies have had their fingers burnt by the collapse of the dot.com boom, and may well be reluctant to invest substantially in new equipment until they see clear evidence that growth will be steady and sustained.

Consumers may not have cut spending hugely, but they are certainly showing a keener eye for a bargain, again something which will prevent profits from soaring.

All of which means that the likely picture will be: Mild recession followed by a weak and slow recovery. The party days of big bonuses are not around the corner.