There could be a nice surprise in store for the US

THE SLUGGISH nature of the economic recovery of the United States is dominating the presidential campaign, and frustration about it may swing the outcome. Yet, for the winner next month, the economy may well become an unlikely glittering prize. Whoever wins will receive the kudos of engineering a secure, low-inflation recovery two or three years out, not because of any new policies but because the elements of that recovery are already in place.

To the British visitor the present performance seems none too bad. Growth will be 1.8 per cent this year - a little above the average for the Group of Seven industrial nations. Compared with previous cycles, though, this is very slow. That is why the US Federal Reserve has cut short-term interest rates to their lowest level for 30 years. It is why Wall Street stands close to its 1992 low, and why last weekend the chairman of the Fed, Alan Greenspan, indicated that yet another fall in interest rates might be on the way.

Politically, the economy is a catastrophe for the present administration. Governor Bill Clinton has scored consistently higher than President George Bush in the polls for his ability to handle economic matters, and the Clinton campaign has focused on this issue: 'If George Bush doesn't understand the problem, how can he solve it?'

But the pain of recession has concealed some extraordinary changes that will help the economy achieve sustained low inflationary growth in three or four years.

First, people and companies are paying off their debts, and the slower the recovery, the more they are doing so. In the view of the Fed, its low interest rates have enabled the rebuilding of the whole nation's finances. Although its policy helps, of course, so does competition between lenders. The phone company GTE is offering a new credit card with an introductory interest rate of 6 per cent, which rises to only 10.4 per cent next May. Much has been made of the failure of low interest rates to stimulate the economy, yet the less they do this, the more they cut debt. How long the process will take is anyone's guess, but it is unlikely to last more than another two or three years.

Second, US industry is performing vastly better than before. Although the progress varies, one important industry - motor manufacturing - shows what is happening. The new US models are just coming into the showrooms - but it is not just the quality of the domestic products that is interesting, though Chrysler's new 'LH' line is attracting enormous attention. No, it is the prices. Japanese producers, squeezed at home by collapsing demand, have to crank out more profit from the US. The result is price increases of between 2.5 and 3 per cent. Ford, by contrast, is holding down average price increases to 0.3 per cent, General Motors to 1.6 per cent and Chrysler, even with its new products, to 2.6 per cent. Ford's Taurus may well topple Honda's Accord as the best-selling car in the US this year.

The US industry was poised to beat back Japanese producers in the early Eighties - then it muffed its opportunity. The balance of power has now shifted: the Americans are lean (or at least leaner), while the Japanese are struggling. Nissan, for example, has plunged into loss for the first time in 30 years.

Third, there will be a publicly funded investment boom. This will happen despite the size of the federal deficit. Although the deficit will hold down the amount of public money coming forward, there is no problem with resources. A string of big infrastructural projects exists and there is slack in the construction industry to fill these needs. Inflation has been beaten - wage settlements are running at about 2 per cent - and there is popular support for modest tax increases (60 per cent favour an increase in petrol taxation) to help to pay for investment.

So while the deficit remains the serious constraint on policy, it does not preclude old-style public works over the next four years. Given the US system of diffused power, some such investment will take place whoever wins the election. But the boom will be bigger under Bill Clinton.

Of course, all this was said about Britain at the time of the election, and the post-election recovery has so far failed to occur. Not only is the time-scale different, however: the US economy is (just) off the bottom and the prospect is for a slow recovery over the course of several years. US and British economic policies have differed, for the US has had cheap money and a bargain-basement exchange rate. As British policy moves towards that of the US the parallels become closer.

The prospect for the next US presidential term, then, is for a slow build-up to steady, sustainable growth. In four years' time, the US economy could seem a relatively successful one by world standards, not the sickly giant of today. If this does happen, then it bodes well for other debt- laden economies at a similar stage in the economic cycle, including Britain. The hardest thing to remember at the bottom of a recession is that somewhere in the future lies the next boom.