American consumer responds to rate cut medicine

Emergency rate cuts by the federal reserve following the September terrorist attacks are at last starting to boost the confidence of America's recession-hit consumers, according to figures released yesterday.

Despite downbeat news from some of America's corporate elite yesterday, the reduction in borrowing costs to their lowest level since Kennedy was in the White House has lifted the gloom in US households.

Consumer confidence, as measured by the closely watched Michigan sentiment index, is rising for the fourth consecutive month in January, to 94.2 from 88.8, even though figures out earlier in the week showed retail sales remained weak.

The US economy slipped into recession in March, long before hijacked planes ploughed into the World Trade Centre and the Pentagon, and analysts said the Fed's recession-busting rate cuts are starting to take effect.

The decision by companies to slash inventories and mothball investment has left Wall Street convinced that a serious recovery will not happen until the second half of this year, but analysts believe that there are now a growing number of hopeful signs.

"It's telling you the same thing everything else is telling you - that people are becoming more optimistic," said James Glassman, of JP Morgan Chase. "The mood is changing partly in response to the Fed's aggressive action, which is supporting optimism, and the economy seems to be doing a lot better than many people feared."

Trade figures for November, also published yesterday, showed the deficit narrowing slightly to $27.9bn (£19.4bn), as exports edged above the lows reached in the aftermath of September 11, when world trade ground to a virtual standstill.

Exports of services rose by $900m on the month to $22bn, helping to offset a fall in exports of goods - but total imports fell by almost $900m, after recovering some ground in October.

Analysts said levels of both imports and exports still looked weak, and much of the narrowing in the trade gap resulted from price effects, with the cost of imported oil falling in November as Opec struggled to strike a deal on production cuts and put a floor under plunging crude prices.

"Since most of the change was in prices, we now have to look for what the real balance was," said Kevin Logan, of Dresdner Kleinwort Wasserstein. "Once you adjust for the prices, the real volume of imports and exports both fell, but exports fell a little bit more. So the real trade balance is a slight drag on GDP."

US exporters have been struggling to sell their products into weak international markets, and the National Association of Manufacturers was due to meet with US treasury officials last night to protest against Washington's strong dollar policy. The dollar's trade weighted value against a basket of other currencies hit 123.4 yesterday, the highest level since the mid-1980s.

Yesterday's trade figures suggested the belt-tightening in corporate America is not yet at an end. The commerce department reported a $1.7bn drop in imports of industrial supplies and materials in November, dwarfing a $200m rise in imports of cars and car parts, driven by strong sales as manufacturers offered cheap financing deals to lure consumers back to the forecourts.