The latest data on the American economy point to a much weaker recovery than previously thought. This could force policy changes not only in America, but around the world, says The Economist in its lead editorial in the latest issue.

The optimists were wrong, says the editorial writer. Those misled by the American economy’s spectacular rebound in the early months of this year were sure that the worst was over. At one point it looked as if America’s economy had grown at a blistering 6% annualized rate in the first quarter, and that last year’s recession was the mildest on record. Betting types decided that the next move in interest rates—in America and other industrial economies—would be up.

John Maynard Keynes once remarked that “when the facts change, I change my mind”: and both have been changing rapidly of late. By the time the Federal Reserve, America’s central bank, met to review interest rates on August 13th, the mood had shifted, with speculation about an interest cut gaining ground. The Fed decided against a cut this time, but hinted that one may come later in the year. Perhaps the Fed will cut as early as its next meeting, on September 24th. The Bank of England also revealed that its Monetary Policy Committee (MPC) had talked recently about cutting interest rates. And few eyebrows would be raised if the European Central Bank lowered rates at its next meeting on September 12th.

What’s happening to the American economy is, of course, the key to prospective policy changes not just in Washington but around the globe. The world’s largest economy is still the only potential engine of world economic growth: Japan is struggling to recover from its fourth recession in a decade, and Europe’s sluggish performance even during the boom years of the 1990s has constantly fallen short of expectations. Now America, too, faces an uncertain economic outlook.

The statement issued after the Fed meeting underlined the extent to which economic assessments were being revised. In June, the Fed judged that the risks were evenly balanced between rising inflation and economic weakness: two months later the Fed has decided that the main risk is of economic weakness. It cited stockmarket turbulence and the series of corporate-accounting scandals in the United States as the principal factors behind the slowing pace of growth since the spring.

In the days following the Fed’s meeting, the stream of data about American economic performance has been enough to make even the most dedicated number-cruncher dizzy. The consumer-price figures released on Friday August 16th showed that the Fed’s governors were right to worry less about inflationary pressures. Inflation remains subdued—just as you’d expect in an economy struggling to regain momentum.

Struggling it is, in spite of a marginally better-than-expected showing for industrial production, business inventories and productivity. These confirm the picture of modest growth. But two other areas give cause for concern. One is in the housing market which, until now, has been an important source of economic strength. The lowest interest rates for 40 years have encouraged many homeowners to re-mortgage and, often, to take the opportunity to release some of the equity in their house to finance consumer spending. But figures published on August 16th showed an unexpected fall in new housing starts in July. The drop was slight, and it still looks as if this year will see more than 1.6m new homes started, which would make it one of the best years in the past decade. And yet it is the danger that the housing market may be slowing which concerns some economists.

Similarly, there are further signs of weakening consumer sentiment. The respected University of Michigan survey of consumer sentiment, also released on August 16th, fell slightly below expectations. And retail-sales figures published on August 13th suggested that this less optimistic mood may already have begun to affect spending patterns, with at least some consumers leaning more towards window shopping than the real thing. Given the critical role personal spending has played in the American economy in the past, this is worrying.

Just because the optimists were wrong does not mean the pessimists were right. There is little evidence so far that the economy is headed for a double dip recession. The Fed was simply warning that a further slowdown was a risk.

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