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America's economy continues to confound the forecasters. The latest productivity figures show it growing at the fastest pace since 1983. But unemployment in April was also higher than expected, and has cast doubt on the strength of economic recovery. Both figures come just ahead of the Federal Reserve’s decision on interest rates
"Only a week earlier, economic euphoria had been the order of the day when it was announced that America’s GDP had expanded at the startling rate of 5.8% at an annual rate in the first quarter of the year. That, too, was a bigger number than most economists had predicted and led the incautious to conclude that the recovery was comfortably under way. Now that optimism must be tempered with the recognition that solid and sustained expansion cannot yet be taken for granted."
"Nevertheless, the unemployment data is a sharp reminder that the recovery is still in its infancy, is still fragile and is likely to be a good deal slower than the recent GDP figures suggested to some people. The productivity figures do not remove the need for caution. Alan Greenspan, the powerful chairman of the Federal Reserve—America’s central bank—has repeatedly warned that after such an apparently mild recession last year, recovery is likely to be equally modest. And there is concern about America’s ability to exploit any recovery. Profits for many firms remain low. Partly as a consequence, business investment— seen by Mr Greenspan as the key to sustained growth—is disappointingly weak."
"If it persists, that weakness could eventually undermine the economy's ability to deliver further sustainable productivity improvements. Household and corporate debt remain high. And the recent, so far modest, slide in the value of the dollar promises to exacerbate America’s massive current-account deficit, as well as threatening a sudden massive adjustment."
"The Fed’s duties are clear—to maximise growth and employment as far as possible, but to do so while maintaining price stability. Notwithstanding some disappointing data in recent days, an increasing number of economists are now starting to think that inflation could become the Fed’s biggest concern this year. The Bush administration, in this case personified by Paul O’Neill, the treasury secretary, continues to insist that it believes a strong dollar is good for the economy and that it is unconcerned about the current-account deficit. It is in any case not clear what effective action the government could take if it thought otherwise."
"But should market concerns intensify, and lead to a dramatic collapse in the dollar, Mr Greenspan might become very anxious about inflation—since the conventional wisdom has it that a sharp fall in a currency can lead to a rapid acceleration in inflation. The Fed might then find itself steering a tricky course between heading off inflationary pressures and sustaining what might become a very weak recovery."
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