US exports economic cold and cures

BRITAIN is the 51st state of the USA in many ways and, as John Major was fond of saying, the US economy is 'the locomotive which pulls the rest of the world'. But after 10 months of laborious chugging and little headway, the train is threatening to come off the rails altogether after being battered by terrorist attacks, anthrax scares and falling company profits that are translating into more lost jobs.

The insecurity that Americans feel about their jobs is spreading and soon it could shake the global economy, according to economists. John Williamson, a British-educated economist at the Institute for International Economics in Washington, said there is a 'pretty dependable' relationship between what happens in the US and what follows in the UK.

For Britons, the worries in America may seem remote. But just as the events of 11 September resonated across the Atlantic, so we have begun sneezing due to America's nasty, streaming economic cold. The symptoms displayed in America in the past seven weeks are troubling. The attacks jolted the US economy into near paralysis. Planes were grounded and shopping malls deserted for days.

Consumer spending makes up two-thirds of America's giant economy and attempts have been made to stimulate spending. Congress has stumped up $100bn (£69bn) to try to get people shopping again. The government wants to make going to the shopping malls, which are invariably draped with US flags, something of an act of patriotism.

Economists are clearly divided on how deep and how long the US recession will be. They cannot even agree on how consumers should react to it. Some urge Americans to clear their debts and hunker down. Others say that if consumers do that, the recession will worsen.

If the experts are right, Britons will soon face similar choices in securing their financial futures in the face of uncertainty. Financial planners, the rough equivalent of Britain's independent financial advisers (IFAs), are advising clients to put money aside and secure lines of credit while they have jobs, just in case.

In an echo of what IFAs may soon be telling their British clients, Americans are being told to refinance their loans and credit-card balances as soon as they can to take advantage of falling interest rates. Despite rates being comfortably higher in the US than in the UK, American 30-year mortgages have fallen to less than 7% and a remortgaging boom has begun. Millions of Americans are swapping out of loans that appeared attractive just a year ago. Official US interest rates have dropped 4.5% since 3 January, down to 2% last week, and consumers are being urged to cash in.

Consumers are also being told to drop credit cards with double digit interest rates in favour of cards tied to official interest rates. Planners are advising consolidating debts under lines of credit backed by the value of their homes. In many cases, consumers have refinanced their mortgages at a higher amount than they were on to give them more money at a low lending rate.

And Detroit, the motor city, desperate for sales since 11 September, has slashed its finance rates to 0%. Some car companies have deferred payments to February, giving the consumer a free ride until after they have paid for their Christmas splurge. 'This is free money,' one planner said. 'If you need a car, now is the time to buy it while the companies are subsidising your loan.'

The message from the investment industry is the same in America as it is in Britain - don't panic. Donald Dondero, who heads a financial planning firm in a Virginia suburb of Washington DC, said: 'We are advising clients to put in place measures so that they will have cash available to ride out the short-term fluctuations in their fortunes.

'Most of our clients have money in the stock market - we want to avoid having them forced out of their investments when the market is down.'

Dondero said clients who have been with him since the seventies were conditioned for a bumpy ride in the economy and in their investments. 'The natural reaction is to want to sell your assets when things become volatile,' he said. 'But you might be selling just at the wrong time, when everyone else is selling, and that, in hindsight, is a terrible mistake.'

Gone are the days when low unemployment and eager technology companies combined to offer job seekers incentives to sign on the dotted line. Above all, planners are urging clients not to quit their jobs until they have another one lined up.

World number one
Two US states, California and Texas, would rank among the world's 10 richest countries.

Population:285 million.
GDP: $10,000bn (£6,9000bn).
Employed: 142,190,000.
Unemployed: 7,009,000.
Unemployment rate: (as of 31 October) 5.4%.
Average annual income per person: £20,300.