Hamish McRae: As America leads us into recession, so it must lead us out of it again

'Economic cycles are funny things. They are all the same, but they are also all different'

The r-word, recession, looms larger in America. The Federal Reserve's decision on interest rates yesterday underlines the growing concern that the US will experience not just a slowdown but a full-blown recession.

Were that to happen, it would be astounding if the rest of the world did not follow, for there is no other significant engine of growth. Japan, the world's next largest economy, is almost certainly in recession now, while Germany, the next biggest, is not growing at all. The rest of Europe is slowing too, though less dramatically than Germany. Much of East Asia – for most of the 1990s the most vibrant sector of the world economy – is already in recession, with energetic, competent countries like Taiwan and Singapore particularly hard-hit by falling US demand for their exports.

The US economy has long been enormously important to the economic health of the world. As the adage has it: "When America sneezes, Europe catches a cold." But the last two recessions, in the early 1980s and early 1990s, were not synchronised. When the US started to head down, the rest of the world was still going up, and when the rest went down the US had started to recover. I suppose it is one side effect of the great surge in trade and cross-border investment that has taken place, particularly in the past decade, that now most of the world seems to be moving in step.

Indeed the only two large economies that so far seem relatively unscathed are Britain and France, and that may not last. France is just starting to see a rise in unemployment, and we face the threat of the same as the redundancies that have been announced start to take effect.

But while some countries (and I would include the UK in this group) may well scramble through the next couple of years in rather better shape than others, the country that will lead the world economy out of recession will be the US. The longer it takes for the US to recover, the tougher it will be for the rest of us. So what should we be looking for across the Atlantic?

At the moment there is a lot of confusion. The Administration is still upbeat, but then it would be, wouldn't it? The Federal Reserve is cautious, but then it would be, wouldn't it? Some parts of the US business community are in despair: the companies whose executives have little experience of recession and instead of being heroes find themselves cast as villains.

The Wall Street community is particularly confused. On the one hand many analysts remain optimistic, expecting share prices to be higher at the end of the year than they were at the beginning. But of course they have lost credibility for wrongly predicting the same outcome last year. The most reviled of all, perhaps, are the Internet specialists – the ones who advised punters to back the members of the "99 club", companies whose shares went on to lose 99 per cent of their value. Several analysts are being sued.

But ordinary Americans seem relatively upbeat, particularly if you look at what they are doing rather than what they are saying. Consumers are still increasing their spending. House prices are still rising, which must help underpin their confidence. As for what people feel, the evidence has to be anecdotal – the reports of friends who live in the US rather than any formal survey of opinion. And here there does seem to be real concern. There are stories of people cutting short holidays because they do not want to be seen as spending time away from the office, or working late even when there is nothing much to do; of rising applications for business schools from redundant executives who think they will have more chance of getting rehired if they improve their qualifications.

So amidst this confusion, what should we be looking for? You can drive yourself round the twist worrying about each half-digested statistic (which will probably turn out to be wrong anyway) or each story of plunging profits and job losses. What we need to know is very simple: when is the US economy going to improve?

Here are four rule-of-thumb indicators. The first, and the most obvious, is: when will the first interest rate rise take place? There will be a few more cuts in rates, but that is boring. What matters is the turning point. Some of the analysts are talking about next spring, but my guess is next summer at the earliest, and it is more likely to be autumn or even winter 2002. But what commentators think is irrelevant: what matters is what the Fed does, because until it is confident that a recovery is in place, it will not start pushing rates back up.

Next, look at US company profits. Once they start to come in higher than the analysts expect, forcing them to increase their estimates instead of cutting them, you can be sure of two things. One is that some sort of recovery has started. The other is that the US corporate community has made the big adjustment that it has to make. Recoveries cannot start until companies have cut their coat according to their cloth – shut the excess plants, written off the excess stocks, and sadly, got rid of the excess workers. One of the main reasons why Japan has been unable to escape recession has been because of its companies' state of denial. The US won't allow that. If, like Mr Micawber, you wait for something to turn up, it won't turn up.

Third, there is of course Wall Street. Once the Street gets a sniff of better times in USA Inc, it will start to reflect that. As with interest rates, do not expect any rapid change of mood, and beware of false dawns. But markets, whatever their faults, are not stupid. Share prices have given a fair warning of these tougher times, for high-tech stocks have been falling for about 15 months. Once a broadly-based recovery in share prices is in place we can all relax a bit.

Finally, look for and welcome a corporate disaster. That might seem a seriously uncharitable thought: "XYZ multinational has gone bust – great!" But my point is that turning points in the world economy often coincide with commercial catastrophes. Traditionally these have been property companies or banks, but this time the bets must be on the telecom industry.

Economic cycles are funny things. In one sense they are all the same: the economies go up and down. But in another they are all different: the shape, the timing, the sectors and countries that get hurt are different each time. That is whywhat is happening in the US is fascinating. It is certainly sneezing; we have to try to avoid the cold.