IBS

AFP

DRIVING around the lush suburbs of Washington, DC, there is little sign of trouble in the American economy. The housing market may have slumped but rental rates are strengthening as the young and ambitious keep pouring into the nation’s capital. The proliferation of restaurants, home-improvement centres and electronics retailers seem to testify to a healthy economy.

So too do the GDP figures released last week. Lacklustre growth in the first quarter had spurred glum talk about possible recession among some economists. But the second-quarter estimates seem to refute this notion decisively. According to the Bureau of Economic Analysis (BEA), America’s economy grew at an annualised pace of 3.4%, a heartening echo of a few years ago. Then economists regarded America as the “engine” of global economic growth, and fretted about what the world might do if it broke down.

America’s economy is still dangerously dependent on its financially overstretched consumers. And those consumers—the real engine—may to be running out of fuel. Personal-consumption expenditures tend to fall in the second quarter as holiday spending winds down. But the drop this year was especially sharp; the rate of growth fell by 2.4 percentage points to 1.3%.

The GDP figures were saved by a substantial boost to fixed investment in non-residential structures, and equipment and software. Other figures support the conclusion that financially strapped consumers may finally be cutting back. On Tuesday July 31st the BEA released data on personal income and expenditures showing that consumer spending had increased just 0.1% in June, the slowest pace of growth in nine months.

A weak job market may be behind this malaise. Though America’s headline unemployment figure looks impressively low—4.5% in June—this is misleading. Other indicators, such as labour-force participation and real-wage growth, paint a picture of a job market where labour demand is less than robust. According to Jared Bernstein of the Economic Policy Institute, participation in the labour market has fallen most sharply among disadvantaged groups, usually the first to drop out of the jobs race when labour demand slackens.

Inflation of the prices of key commodities, such as petrol, is also cutting deeper into pay-packets, forcing Americans to eliminate discretionary purchases. And the nasty combination of falling housing prices and rising interest rates is forcing many new homeowners with variable-rate mortgages to slash their budgets everywhere else in order to meet their rising house payments. Even so, defaults have climbed precipitously, particularly in the subprime market.

What is the truth? Is America’s economy like a Victorian tuberculosis patient, with blooming cheeks and rotting lungs? Or has it merely caught a slight cold? It is hard to tell. Every time one set of indicators seem to be running one way, another lot points in the other direction. The mildly gloomy government figures on employment and consumption might indicate an economy sliding slowly downhill. But the Conference Board’s latest snapshot shows that American consumers do not agree. Consumer confidence has hit its highest level in six years.

Economists, too, have tempered their gloom. A survey of economic analysts has them estimating that payroll employment increased by 130,000 workers in July, the same robust growth seen in June. They also predict a 3.8% increase in wages from the same period a year ago. If they are right (the reports are due out later this week), this will help assuage labour-market jitters.

One thing economists are not worried about is what will happen to the rest of the world if the engine fails. Growth has picked up in Europe, especially in Germany, the continent’s former “sick man”. And Japan is climbing out of its decade-long doldrums to pick up even more of the slack. But neither place looks poised to become as import-hungry as America. But even America is losing its appetite a little these days. Falling imports were another big contributor to the improvement in America’s rate of GDP growth. So far, the world still seems to be chugging along.