The US looks set to implement a package of tax cuts and spending measures after Ben Bern-anke, the chairman of the Federal Reserve, backed calls for a fiscal stimulus package aimed at staving off recession.
The gathering consensus on Capitol Hill for such a package, which could inject more than $100bn into the economy, was given extra impetus yesterday after the latest dire manufacturing survey and another sharp sell-off on the stock market.
In testimony to the House of Representatives budget committee, Mr Bernanke warned that the US economy was continuing to deteriorate and indicated for the first time that he expected business investment to slow this year. The US consumer, burdened by onerous mortgages and higher fuel and food costs, is already pulling back. "To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so," he said.
The White House also threw its weight behind an economic rescue package, which is likely to include tax rebates similar to the $300-$600 cheques mailed to taxpayers during the previous downturn, in 2001. President George Bush was scheduled to begin consultations with Congressional leaders last night and could announce his proposals today.
Kevin Logan, chief US economist at Dresdner Kleinwort, said action that put money into the hands of consumers within a few months could avert a recession this year. "Rising unemployment is galvanising politicians into action very quickly," he said. "I have never seen it happen this fast."
Fears over the economy, and continuing Wall Street losses from the credit crisis, pushed the Dow Jones industrial average down 307 points to 12,159. A similar sized decline by the Russell 2000 means that US small-caps are now officially in a bear market, down 20 per cent from their peak. Stoking concern yesterday, the closely watched Philly Fed index, which measures manufacturing in the Philadelphia region, contracted much more sharply than expected, recording its lowest reading since 2001. Ian Shepherdson, the chief US economist at High Frequency Economics in New York, said: "This is very alarming because we had pinned our hopes on the relative strength of the corp-orate sector offsetting some of the housing hit. This is bad."Reuse content