US sets a cracking pace

WHEN the American economy takes off it does so with a whoosh. The 7.2% rise in the annual rate of output in the third quarter outstripped expectations and represents the best showing for the US since the first quarter of 1984.

Indeed, the velocity of the upturn is similar to that which carried Ronald Reagan back to the White House in the same year.

George W Bush will no doubt be thanking his lucky stars. The decision to abandon fiscal discipline and cut taxes for the third time in his presidency is now paying rich dividends.

He also has been helped by Alan Greenspan at the Federal Reserve, who decided falling prices for goods was more dangerous than inflation and held America's key interest rate at just 1%.

What will be most encouraging about the third- quarter data is the broad nature of the recovery, something Gordon Brown can still only dream of at present. Overall investment climbed 9.3%, fuelled by a 15.4% rise in business investment.

As in Britain, consumption also has been robust, with spending up by more than 20%. Outlay on cars was up a whopping 26.9% - reminding us all of the famous dictum of Charles Wilson, who told a Senate committee: 'What is good for the country is good for General Motors, and what's good for General Motors is good for the country.'

The great concern for the Bush White House as it looks towards next year's elections is that this will be a recovery without any improvement in unemployment, at present 6.1% of the workforce. Hopes on this front have risen with 57,000 more workers employed in September.

One might have thought, given the strength of domestic demand in the US, that the trade deficit would have worsened. But exports climbed by 9.3%, helped by the weaker dollar, and imports increased by only 0.1%.

Clearly, the pace of recovery cannot be maintained over the long haul. Fading consumption as the tax cut effects wear off, and rising imports will curtail output in the final months of the year. This will bring fourth-quarter growth rate back to a more normal 3% to 4%.

But it is as well to remember that recovery has a heavy cost in the shape of a sharply worsening budget deficit.

Golden Balls
GORDON Brown will be back at his desk at the Treasury next week after two weeks of paternity leave. In his absence, his chief economic adviser Ed Balls has been raising his head above the parapet. In a speech to the CBI in Manchester, he made it clear Labour is determined not to abandon its commitment to stability, the bedrock of Brown's period at the Treasury.

This could mean some tough decisions for the Chancellor in the pre-Budget report and next year's Budget. Brown and Balls still remain more optimistic than private- sector economists on growth and the public finances.

In its latest report, the National Institute of Economic and Social Research questions the stability of the public finances.

It warns that over the last quarter they have 'deteriorated further' and the Chancellor is now in danger of breaking the golden rule of balancing current spending with current revenues over the present cycle.

The Treasury demurs, pointing out that its forecasting has been consistently better than that of the NIESR.

What is perhaps more important than this 'yah boo sucks' is Balls' insistence that the government will maintain 'our disciplined approach to public finances'.

In other words, spending ministrieshad better watch out. Moreover, if as widely expected, the Monetary Policy Committee decides for 'pre-emptive' reasons to raise interest rates next week, it can expect no quarrel from Brown. Balls assured his audience that the government will 'stand ready to back the MPC in all its decisions'.

Go on, Mervyn. Do your worst!

Knitwear alert
CAN you judge the health of a major department store chain such as Marks & Spencer on the basis of special offers on knitwear?

The stock market seemed to think so when it marked down the shares in latest trading.

What investors failed to notice was that M&S warned that clothing sales were down in September as a result of the hot spell, and it was now taking advantage of cooler weather to play catch-up with some pre-planned discounts.

Those who sold short ahead of next week's trading statement may yet catch a cold.