America down but not out

THE third-quarter growth figures from the United States could have been a great deal worse. The longest expansion of the American economy since the 19th Century may be ending, but it is not yet coming apart catastrophically.

The 0.4% decline in output in the three months ending in September is the biggest decline since the US was last in recession under George Bush Senior in the first quarter of 1991 in the wake of the Gulf War.

Given that the economy was already slowing rapidly ahead of the September 11 attacks and that the Wall Street consensus was for a far sharper decline of 1.3%, the current Bush administration is right to see this as something of a victory.

The main driver for the slowdown - the run down of inventories by business - was already in place before Osama Bin Laden did his stuff. What the attacks did was to lay a decline in consumer spending on top of the business slowdown, underlined by the myriad profit warnings of major corporations.

The big question for the fourth quarter is whether the stumble in consumer spending is sustained as a result of the uncertainty engendered by terrorism, pushing the US into a full-blown recession.

There is little doubt that Washington has laboured hard to try to keep the American economy afloat and to keep the terrorists from having an economic and financial victory.

The aggressive cuts in US interest rates ahead of and after the terrorist attacks are testimony to the sound judgment of Federal Reserve chairman Alan Greenspan. The tax cuts brought in by President George W Bush, soon after taking office, also have played a part in holding up the gross domestic product figures.

In fact, US Treasury Secretary Paul O'Neill was optimistic enough to forecast that if the Congress were to pass a further tax-cutting package in November, worth an additional $70bn, it was possible that growth could be restored in the final three months of the year and that there would be no American recession.

That would clearly be placing too bright a gloss on matters. Aside from the US's own domestic problems, the rapid slowdown in Europe and the recession in Japan means that there are no global drivers for American growth.

Add to this deteriorating consumer confidence, falling retail sales, a weakening housing market and damage done to the travel and insurance sectors of the economy by the terrorist attacks and one begins to see the scale of the problem in engineering a bounce-back.

The smaller-than-expected scale of the downturn for America is brighter news on this side of the Atlantic, despite some disturbing data here showing consumer confidence faltering. The Gfk index in Britain dropped in October to minus five, the lowest level since the middle of last year. But given the scale of the political and economic uncertainty over recent weeks, this can hardly be regarded as a stunning setback.

The latest data was enough to halt the recent slide in share prices and to give a fillip to the dollar, which has recently slipped against the euro. There plainly is no room for complacency. The recent series of job losses chronicled on these pages speaks of financial stress. Moreover, the GDP data from the US is very preliminary and includes less than two weeks of the post terrorism side.

It is not time for investors to fill their boots quite yet.

Terror clampdown
THE momentum in the financial war against terrorism is building. The latest list of 200 suspects, which the US has supplied to financial regulators including Britain's Financial Services Authority, is focusing on the highly-secretive world of private banking. The suspicion is that much of the wealth that keeps the networks alive is being channelled through the accounts of Gulf-based individuals.

Switzerland is joining in with the clampdown this time, and has frozen 24 bank accounts of individuals, companies and organisations identified by the US.

Switzerland is also party to the agreement forged in Washington by the Financial Action Task Force which is moving beyond its traditional money-laundering remit in the effort to eliminate terrorism. Among other things, it is seeking to criminalise the financing of terror, to establish a mechanism for reporting suspicious transactions and to freeze and confiscate assets that could find their way into terrorist organisations. Much of this, as Gordon Brown pointed out last night, is catching up with what the UK already is doing.

If a wider group of countries, including Switzerland and the Gulf states, can be drawn into the net then some real progress does look possible.