There can now be no doubt that the US economy is slowing rapidly. This week's decision by the Federal Reserve Board, the US central bank, to reduce interest rates for the second time in a month thus comes as no surprise. The US federal funds rate - the rate at which banks lend to each other in the US - has now fallen by a full percentage point since the start of the year. It is a decisive response by the Fed, but it remains to be seen how successful it will be in supporting economic growth.
The US economic picture has changed dramatically over the past few months. The latest figures indicate that economic growth slowed to 1.4 per cent in the fourth quarter of last year and unemployment is edging up. The level of manufacturing activity, as measured by the National Association of Purchasing Managers Index, is at its lowest level since March 1991. The situation required a "rapid and forceful response" in terms of lower interest rates, according to the statement announcing the latest cut by the Fed.
Some of the US economic signals are worrying. Business investment has fallen sharply in recent months, while consumer confidence is also on the wane. Both companies and households are heavily indebted. The US stockmarket - particularly the NASDAQ index dominated by high-technology stocks - has suffered in recent months. A collapse into recession is thus a possibility.
The Fed will hope that lower interest rates will lessen this risk. By lowering the cost of servicing debt and taking on borrowings, lower interest rates stimulate the economy. More importantly, in the short term at least, the Fed's action should help to bolster confidence, a crucial factor in the economic mix. Its statement this week suggests that it is ready to cut interest rates yet further, if it believes this is required. Monetary policy is far from an exact science. The US Federal Reserve Board chairman, Mr Alan Greenspan, has a well-deserved reputation for helping to sustain the longest continuous US economic expansion on record over the past decade, through judicious interest rate changes. However the speed of the current slowdown has taken even the Fed by surprise.
In the light of the recent data, the Fed's decision to reduce rates twice during last month appears justified and is a decisive response to the emerging economic picture. The new president, Mr Bush, is to press for lower taxes, another measure which could help to stimulate the economy. Mr Greenspan appears to have signalled his broad acceptance of this strategy. The Republic's economy is particularly vulnerable to events in the US. The state's major employers are US multinationals and the US now rivals the UK as our single biggest export market. Already we have seen a trickle of lay-offs at some of the big companies here. The latest Irish unemployment figures, published yesterday, show that the rate is at an exceptionally low 3.6 per cent, indicating that the jobs market remains very strong.
But the trend in the US economy is of concern, nonetheless. A sharp downturn would quickly knock on to the economy here, particularly if it heavily affected some of the major US high-tech employers. This should be avoided if Mr Greenspan's medicine works. But it remains to seen whether it will.