American slowdown raises soft landing hopes

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The Independent Online

The American economy slowed sharply in the latest quarter, reinforcing expectations that interest rates will stay on hold and boosting hopes of a "soft landing".

The American economy slowed sharply in the latest quarter, reinforcing expectations that interest rates will stay on hold and boosting hopes of a "soft landing".

Gross US domestic product rose 2.7 per cent in the three months to September, less than half the previous quarter's 5.6 per cent and below forecasts of 3.5 per cent. Economists said the figures showed that the Federal Reserve had succeeded in reining in the economy. Some analysts even raised the prospect of a rate cut. David Orr, an economist at First Union Corp, said: "This raises the possibility of the Fed considering a rate cut as soon as March."

Signs of a slowdown in the blistering pace of economic growth boosted the euro as the dollar weakened.

The Federal Reserve has raised interest rates six times since the middle of last year as part of its strategy to bring about a soft landing - a slower growth without higher inflation or recession. The main factor was a slowdown in business investment, which grew 6.9 per cent compared with 14 and 21 per cent in the previous two quarters. Government spending and new housing investment also fell - at the fastest rate for five years.

Adam Cole, global economist at HSBC in London, said: "If this is this a slowdown - and this could still turn out be just a pause - then it looks like a fairly soft landing."

But the detailed figures flashed up a couple of warning signs. Consumer spending rose, with a surge in spending on durable goods, indicating economic growth might bounce back this year. Ian Shepherdson, of High Frequency Economics in New York, said: "Private sector growth was robust so the soft headline [figure] does not bring Fed easing closer."

There was also concern over a fall in spending on equipment and software, which dropped to 8.5 per cent from 17.9 per cent.

Investment by businesses in telecoms and IT equipment and software has been the driving force behind the growth in productivity of the US workforce.

The dollar fell across the board as hopes of rate rises faded. The main beneficiary was the euro, which at one point was up by more than 2 per cent from Thursday's lifetime low.

The European Central Bank has argued that the euro will start to climb once the US economy slows.

Alison Cottrell at PaineWebber International said: " US figures have rarely surprised on the down side so this provides psychological support for the euro. It gives it breathing space which could be beneficial."

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