US recovery takes root despite job losses

IT looks as if the meteoric rise of the euro against the dollar may be over. While the Bush gang favoured a weaker dollar, the fall to $1.29 to the euro puzzled some.

Up to a week ago, it still looked as if the dollar might tank and fall to as low as 1.40 or worse.

Concerns about economic recovery in the US, apart from the weak dollar policy of the Bush administration, advanced its slump.

It was the collapse into an eight-month recession by the US in 2001 that reduced global growth down to a trickle. Ever since, the debate has centred on the ability of the US to recover and avoid what many described as a double-dip recession.

Again, the back-drop to the debate about the world outlook was that after every major boom, there was always a bust.

That’s what the textbooks from the dismal scientists tell us and most of the sentiment surrounding the US economy has been informed by that view.

Previously that has been the experience with most booms followed by a fairly long period of slow growth.

Scepticism about the state of the world economy after the stock markets tumbled in 2000 is understandable. While the debate raged, one important factor was missed in the overall discourse over what fate had mapped out for us.

That factor has two elements to it. First of all, the US consumer accounts for 75% of GDP and secondly, Alan Greenspan cut interest rates to keep them champing away while manufacturing retreated to lick its wounds.

As chairman of the US Federal Reserve, Greenspan cut rates by a total of 5.5% between January 2001 and June 2003.

It was unprecedented and act, sufficiently powerful to keep consumers buying even if the pace slowed as confidence and spending power ebbed.

It looks now, however, that the strategy worked and prevented a dragged-out recession. For whatever reason, Greenspan, the wily old banker, demonstrated that boom and bust cycles can be eased.

In doing so, he probably rivalled the President of the United States in terms of having real power to influence global events.

This was done judiciously and without ever startling the markets into panic-selling of shares or dollars.

And after the endless debates about the destiny of the US, it looks as if the worst is finally over. 2005 may be another story, but the current shift in sentiment about the US is tangible. For the first time, Greenspan indicated the next move in US interest rates will be upwards.

Europe’s cabal of ECB bankers have also indicated a similar fate for the euro.

What that means is a firm belief in the recovery story affecting the US and to a lesser extent in Europe.

It has been a nerve-jangling ride, but it looks as if the worst is over, for the time being at least.

At its meeting on Thursday, the Fed left its historic low base rate untouched at 1%. But critically, there was a change of tone in the statement that the Fed released.

The Fed said it could remain “patient” on interest rates, a remark interpreted by the markets that it has started to consider its first hike in interest rates for the first time in over three years.

Typically, the markets saw this as bad news because of its implications for corporate profits and the Dow fell 1%, showing the path to economic recovery never runs smooth.

But for some time, the emerging consensus has been that recovery is taking root despite the lack of jobs in the system. It’s easily forgotten as the euphoria returns, that 2.5m jobs were lost in the US during this slowdown.

It’s a reminder, as the good times return, that the real victims of these upsets are human beings and not stock markets.