US rates something of a mystery

Today's figures for US GDP in the latest three months will show that the economy was roughly flat, but it is sure to bounce back this quarter. The bounce will not be very high. For one thing, the American recovery is five years old - the length of an average recovery and therefore practically geriatric. For another, the economy is operating at full employment, with little scope for more job creation. Even so, the growth rate will rise from zero to 2.5 per cent or so.

It is possible to be fairly confident if you look at the reasons for the pause. One was the Mexican crisis, the full effects of which came in the second quarter. A related reason was a tax double whammy. High- income taxpayers faced tax increases for 1993 and 1994, due this April. At the same time, the Internal Revenue Service tightened up on tax fraud at the bottom of the income scale. Finally, last year's interest-rate rises slowed some consumer spending. More recent falls have begun to reverse this.

There are risks from serious confrontations later this year over the budget, between the President and the first Republican-dominated Congress since the early 1950s. The odds are that the deficit will fall - Congress's Office of Management and Budget guesses by about $25bn to $140bn next year. If passed, a radical Republican programme could even fall quite steeply in subsequent years.

Contracting the size of government could hit economic growth severely in the short term, but it is not easy to predict how much - or how much the Fed would then lower interest rates. What's more, Alan Greenspan's term as chairman is due to end in March. Bets on interest-rate policy are off if President Clinton decides to replace him.