First the good news...

Hurricane Gustav may have taken the headlines, but the economy will still play the key role in America's presidential election, now just two months away.

That’s bad news for John McCain — even with his new young running mate, Sarah Palin. House prices are plummeting, consumers are tightening their belts, and the economy is in a recession.

Except, wait a minute. The US economy isn’t actually in a recession — at least not according to the technical definition of a recession as a fall in gross domestic product in two successive quarters.

Last week, the estimate of second quarter growth was revised upwards from 1.9 per cent to 3.3 per cent. How Germany or Britain would love a recession like that!

Even on a less technical definition — described by the National Bureau of Economic Research as “a significant decline in economic activity spread across the economy, lasting more than a few months” — America is not in a recession.

So, the US economy grew by 3.3 per cent in the second quarter and all's well is it? Well,er , no, that’s not quite true either.

What happened in the second quarter, as this BBC report makes clear, was that the US economy grew at an annualized rate of 3.3 per cent — that is, at a rate which, if it continued for 12 months, would produce annual growth of 3.3 per cent. That’s still good, but not quite the same thing as growing by more than 3 per cent in a quarter.

Most of that good second quarter performance was due to a dramatic improvement in America’s foreign trade. The falling dollar in the first half of the year led to exports rising at an annual rate of 13.2 per cent. At the same time, weak spending in the US caused imports to fall at an annual rate of 7.6 per cent.

In effect, as the Financial Times pointed out, the US is now exporting its slowdown to the rest of the world. And a further US downturn is forecast.

Slowdown. Downturn. Those are words that accurately describe what’s going on in the US, with rising unemployment, reduced working hours and falling house prices causing large doses of pain. No wonder so many regular Americans feel like they are in a recession, even if the economic eggheads say they aren’t.

And when it comes to voting in November, regular voters will far outnumber economists. That’s bad news for John McCain.

Ian McMaster
Editor-in-chief