The Financial Times now sounds very pessimistic on the strength of the U.S. recovery as well. I don't understand how they--or anyone--can take the surge in vehicle purchases this quarter as a positive sign, and read it as anything other than a temporary blip that will borrow GDP growth from the fourth quarter.

FT.com Home US: ...For some time now, US economic activity has circulated in an uneasy but temporarily stable holding pattern. Consumers keep spending.... Meanwhile businesses hold back on investments, waiting for a definite upturn in profits. Recent retail sales figures show that consumer spending, about two-thirds of the economy, has remained strong and is likely to produce a healthy headline growth rate of 3.5-4 per cent for the economy as a whole in the third quarter of the year. But about half of the robust 0.8 per cent growth in August was supplied by extraordinarily strong vehicle sales.... From an optimistic point of view, the rise in sales is a powerful indicator of confidence in the future.... The pessimistic interpretation is that car sales have been artificially boosted by zero financing promotions by dealers, with households merely bringing planned purchases forward. This implies that when the one-off boost to sales has passed, consumption will join the rest of the economy in the doldrums...

America sputters

By Alan Beattie | Published: September 20 2002

As the US baseball season moves towards its autumn climax, the economy recalls the famous malapropism of the great Yankees player Yogi Berra: "it's like déjà vu all over again".

This time last year economists were looking anxiously at a number of weak points in the US economy. Officials at the Federal Reserve, whose interest rate setting open market committee meets next week, are faced with similar conditions. Businesses are still worried about their future profit and are dismissing employees. Falling stock prices are taking their toll on consumer confidence, prompting fears of a sharp retrenchment in household spending. The Dow Jones industrial average fell by nearly 4 per cent this week and has now lost all the gains it made over the summer. And the US is preparing for a possible war of unknown duration and uncertain cost.

While some recent signals have provided reassurance that the economy is continuing to sputter along, there is still no sign of the strong, durable and broad-based recovery that policymakers were expecting.

And until there is, the stalling job market will evoke memories of a similarly worrisome episode from rather longer ago: the "jobless recovery" of the early 1990s, where uncertainty about the strength and duration of the upturn kept unemployment high long after growth had restarted.

"There must now be serious disappointment with the fact that a self-sustaining recovery is not yet under way," says John Lonski, chief economist at Moody's, the investor services agency.

For some time now, US economic activity has circulated in an uneasy but temporarily stable holding pattern. Consumers keep spending, though not always strongly enough to keep the economy at trend growth. Meanwhile businesses hold back on investments, waiting for a definite upturn in profits.

Recent retail sales figures show that consumer spending, about two-thirds of the economy, has remained strong and is likely to produce a healthy headline growth rate of 3.5-4 per cent for the economy as a whole in the third quarter of the year.

But this spending is uneven. About half of the robust 0.8 per cent growth in August was supplied by extraordinarily strong vehicle sales, of which the implications are unhelpfully ambiguous.

Cars, along with houses, are among the easiest purchases to defer. So, from an optimistic point of view, the rise in sales is a powerful indicator of confidence in the future, more reliable than the survey-based measures of consumer confidence, which have been rather gloomy.

The pessimistic interpretation is that car sales have been artificially boosted by zero financing promotions by dealers, with households merely bringing planned purchases forward. This implies that when the one-off boost to sales has passed, consumption will join the rest of the economy in the doldrums. To make matters worse, one large weakness from the 1990s boom remains: the overhang of household debt that could at some point overwhelm even the American consumer's legendary optimism.

The behaviour of the business community is the opposite to that of the consumer: fewer debts but a greater reluctance to spend. Companies have rebuilt their balance sheets, leaving them freer to fund more investment.

Indeed, the most recent figures show an uptick in durable goods orders, the first hopeful sign that the long-awaited rise in capital spending - which Fed officials originally predicted for the third quarter - has started at last.

But the disappointing performance of profits could easily push back a sustained upturn into next year. And with businesses uncertain about the future, they are reluctant to take on new staff. Monthly new claims for unemployment benefits are now consistently above the 400,000 level traditionally associated with a recession.

The serious risk for the Federal Reserve is that the gloom in the boardroom may spread to the consumer. For the moment, the Fed seems to have hunkered down to wait for clear signals either way. US monetary policymakers are undoubtedly dis- appointed that the recovery has done little more than bump along so far this year.

"For a while now, when it comes to the economy, the glass has either been half full or half empty," Robert McTeer, president of the Dallas Fed and a member of the Fed's open markets committee, said this month. "I must say, however, that half full has become a bit of a stretch lately."

That said, the overall attitude at the Fed appears to be one of watchful concern rather than trigger-happy activism. The widespread belief remains that the Fed will leave interest rates on hold next week .

"For the Fed to cut rates, they have to answer in the affirmative to one of three questions," says Bruce Kasman, US economist at the investment bank JP Morgan Chase. "Is the rate of growth heading to 2 per cent or lower; is there an imminent threat of deflation; or is the financial sector causing problems for the rest of the economy?" Unless there are truly dramatic movements in stock markets in the coming week, following Thursday's falls, none of these appears yet to be the case.

Those paid to bet on interest rates in the futures markets continue to expect rates to be left on hold. Still, this week the perceived probability of a surprise quarter-point cut next week drifted up towards 25 per cent as the effect of the falls in equity prices sank in.

The last imponderable that could come to upset the delicate equilibrium in the US economy is the prospect of war with Iraq. So far, apart from a war premium of between $3 and $8 a barrel that already seems to have been priced into the oil markets, it is difficult to see a dramatic effect on the economy from the gathering clouds of conflict. This implies that if the war turns out to be protracted or to set off a wider Middle East conflagration, there could be further destabilising reactions to come in financial markets.

Part of the market's reluctance to react reflects the fact that the cost and nature of of any possible war are unknown.

The Bush administration's economic team has been attempting to play down the direct effect of the cost of a war, thus eliminating economics as a constraint on foreign policy. Larry Lindsey, Mr Bush's chief economic adviser, in a possibly misplaced attempt to give reassurance, mused last week that a war might cost 1-2 per cent of gross domestic product, about $100bn-$200bn, (£64bn-£128bn), a figure the White House subsequently pointedly failed to endorse.

This figure is larger than other estimates, including an internal Pentagon reckoning of $50bn. But even at a time when the government finances are due to slide into deficit, such a one-off cost would be a small addition to the US's $3,600bn public debt and might even provide a useful boost to spending.

More worrying than the direct cost, or even the arithmetic effect of higher oil prices, is that the prospect of war simply adds another source of uncertainty, further dissuading businesses from investing or consumers from taking on more debt.

"The standard rule of thumb for a $10-a-barrel rise in oil prices is that it takes only 0.2-0.3 percentage points of growth off the US economy," says Mr Kasman. The effect on the US, as an oil producer, is a little more muted than for pure oil importers such as Japan. But history suggests there is some extra effect on confidence from a particularly large oil shock or from conflict, economic or military, that causes it. "Every time oil prices double, the US economy seems to be in recession a year later," Mr Kasman says.

Even in the absence of a war with Iraq, the economy's present performance recalls another of Mr Berra's remarks, made when his batting was going through a lean patch. "Slump? I ain't in no slump. I just ain't hittin'."