Why does anyone still think that the US economy is in recession? A week ago, this belief acquired a host of new adherents when Jean-Claude Trichet, the European Central Bank President, more or less promised to raise eurozone interest rates on July 3, while US statisticians reported a jump in the unemployment rate from 5 to 5.5 per cent. Financial markets duly bid up the euro and dumped the dollar. This currency move triggered the biggest one-day leap in oil prices on record. This price surge, in turn, confirmed that recent movements in the oil price, which have had a 97percent daily correlation with the dollar-euro exchange rate, have been driven almost entirely by financial players and have had very little to do with energy supply and demand.

But is America really in recession? Experts seem to think so, including Alan Greenspan, Warren Buffet, George Soros and Martin Feldstein, the chairman of the National Bureau of Economic Research (NBER), the academic committee in Boston that determines business cycle dates. But where is the evidence for this belief?

To be sure, housing and finance, two important parts of the economy, are in serious trouble. Yet housing now accounts for only 3.5 per cent of GDP, down from a peak of 6.5 per cent two years ago, so most of the pain has already been felt there (in contrast to the situation in Britain and Europe). The financial sector is bigger, employing 5.9 per cent of American workers, but only a small proportion of these are employed in cyclically sensitive jobs related to mortgages or wholesale finance. These two sectors between them employ far fewer people than the manufacturing and tradeable service industries that are benefiting from the cheap dollar. And thus far the troubles in US banking and construction have been almost exactly offset by gains in America's booming international trade.

There is a world of difference between a dislocation confined to only one or two parts of the economy, such as housing and finance, and a generalised economic decline. Remember the official definition of recession devised by the NBER: “A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail trade. A recession influences the economy broadly and is not confined to one sector.”

The difference between a general recession and a sectoral slowdown is not just a semantic quibble. For businesses and workers, a slowdown is a period of weak growth, modest job losses and disappointing profits; a recession is marked by mass unemployment and widespread bankruptcies. For the financial markets, the two have totally opposite implications. In a recession, share prices collapse and the only safe assets are government bonds; in a slowdown, there are big shifts in relative performance between stock market sectors, but equities generally do well (as they did in the late 1990s and late 1980s) while safety-first bond investors suffer enormous losses, as they did in 1994-95 and 1986-87.

What, then, is the evidence of America moving into recession? Looking at the statistics used by the NBER, there is little or none - at least so far. GDP has continued to grow, albeit slowly, in the past two quarters and almost certainly will accelerate in the current quarter because of booming exports; industrial production has been positive, as have real income and whole-retail trade. Employment has fallen slightly, but by nowhere near as much as in the mildest of past recessions. Reliable high-frequency indicators, such as the monthly purchasing managers' surveys, point to continuation of modest growth.

Most importantly, consumer spending has remained robust.

American consumers, far from cutting back to bare essentials as was expected by bearish commentators after the credit crunch, are actually increasing their spending. The evidence of this, contained in the strong retail sales figures for May published last Thursday, was by far the most important economic news of the past few weeks. Yet these figures received almost no media coverage and little market attention.

Yet May's retail sales figures revealed a picture completely at odds with conventional wisdom about the US economy. Despite the jump in energy prices and the related collapse in measures of consumer confidence, retail sales rose by 1.1 per cent on the month, the strongest gain since last November. Sales adjusted for inflation and excluding food and energy also showed gains much stronger than expected. Also April's sales, initially thought to have fallen, were revised upwards to show a significant gain - and the two-month average of these volatile figures suggested that growth in the US consumer economy is now similar to the rate a year ago, before the sub-prime crisis and credit crunch.

This conclusion is not based on one set of good retail sales statistics, but includes stronger-than-expected recent figures on industry sales, stocks, imports, exports, purchasing managers' surveys and even home sales. But in saying this, am I not forgetting about the dreadful employment figures published last Friday, which triggered the collapse of the dollar I mentioned at the start? Not at all. Despite the shock-horror headlines about a terrifying leap in unemployment from 5 to 5.5 per cent, employment figures for May were quite strong and fully consistent with the message of economic acceleration. Rates of unemployment are irrelevant in timing the economic cycle, since they are a lagging indicator, turning some six to nine months after the economy as a whole. Meanwhile, the job creation figures, which do reflect current economic conditions, showed a modest decline of 49,000 in payroll employment, exactly in line with expectations and consistent with the economy growing at about 1.5 per cent, just slightly below the 2 per cent trend rate of productivity growth.

Of course May's strong retail sales were due in part to the tax rebates of $600 to $2,000 per household from the US Treasury from last month. Many analysts, therefore, dismissed the gains as misleading. But this was the wrong response. The role of tax cuts in boosting consumer spending is a reason for optimism, not scepticism, about the economic outlook. The tax rebates were designed to boost consumer spending and that is why we have always expected (in line with the Fed and the US Treasury) to see economic recovery from this summer. Retail sales figures have now shown that the US tax cuts are working as planned. They will temporarily boost consumption - and by the time that this temporary tax boost runs out around Christmas, the US economy will be starting to enjoy the benefits of lower interest rates, operating with a lag of 12 to 18 months.

In much of this discussion, my optimism on US economic statistics has been qualified by the weasel words “so far”. But this can change. Until this month, sceptics could predict that trouble lay ahead for America once consumers finally realised that their credit had run out. But the strong consumer response to the $110 billion tax rebate programme changes the balance of this argument.

With the rebates flowing into bank accounts and boosting real disposable incomes, the period of greatest risk for the US economy has passed. For the next two quarters, disposable incomes will rise at an annualised rate of 8 per cent or more and, given the normal lags between money appearing in bank accounts and flowing into shop tills, the tax rebates will guarantee decently strong retail spending between now and Christmas - maybe a temporary consumer boom. If there were going to be a US recession in response to the credit crisis, it would have started by now. So let me stick my neck out and say without qualification - the US economy is out of the woods.

anatole.kaletsky@thetimes.co.uk

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