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Last week saw the Republican Party hold its pre-election convention in New York. The way the Americans conduct these events makes our own political conferences appear like children&#39s tea parties. The occasion allowed the party faithful to reaffirm their support for President George Bush in the race for the White House, not that there were any rival candidates. Still, the signs are that the incumbent of the Oval Office could have a tough time of it once the new term starts in 2005.

President Bill Clinton once famously replied to the question on what was the most important element of his election campaign, “It&#39s the economy, stupid.” It&#39s the economy that is not behaving quite as it should in the run up to this year&#39s election. A key index of confidence slumped from 105.7 in July to 98.2 for August. This may not sound too significant but the market had been expecting a more modest drop of perhaps just two points or so. It was sufficient to send the dollar tumbling against the euro when the fall was announced last week.

As if this was not enough, the Chicago purchasing managers&#39 index, also published last week, recorded an unexpectedly big drop, falling from 64.7 in July to 57.3 last month. These PMIs, as they are known, are considered a good lead indicator as to what is happening in the real economy – in the case of this particular index, in the Midwest manufacturing industry. After all, if those charged with buying in the goods and services needed to meet the demand for their companies&#39 products do not know what is really happening, then who does?

In one way, it is surprising that market expectations were not weaker than they were. Rising interest rates, soaring oil prices and recent surprisingly downbeat data on the US jobs&#39 market must all have combined to undermine confidence. It is the confidence of the consumer that is crucial to American economic well-being. Consumer spending accounts for two-thirds of economic activity in the US, so a population that decides to retrench on its spending plans because of uncertainty over the state of the economy can only exacerbate what is beginning to look like a difficult situation.

Of course, it would be wrong to be too pessimistic over how a slowdown in the US recovery might impinge upon the rest of us. For a start, any administration in the biggest economy in the world is bound to prime the pump to ensure that a slowdown does not turn into a full-blown recession. Governments and central banks are rather better at finetuning these days, although it has to be admitted that the degree of interdependence between countries does carry some level of risk. America, for example, imported $3.9bn worth of goods from Great Britain in June alone – not small numbers in anyone&#39s book and something that British exporters must be aware of.

Perhaps the country that has most to fear from a US slowdown is China. In June, America imported nearly $17bn worth of goods from the world&#39s most populous nation, up from $15bn in May. With many commentators, including respected economic thinktanks, warning that the breakneck pace of economic expansion in China cannot run on unchecked, it is looking increasingly likely that Chinese GDP growth will fall to more acceptable – and more manageable for that matter – numbers. If it does not, then there will be environmental issues to be addressed.

Given that China has surpassed Japan as the world&#39s biggest importer of oil, a slowdown could have the surprising, and certainly beneficial, effect of taking some of the steam out of the oil market. This in turn should help US consumer confidence, which in turn could help the jobs&#39 market. And so on, and so on. Interdependence need not be a bad thing but these are worrying times, nonetheless.

Back home, there are some signs that the property market is now cooling at an impressive rate. Homeloan applications are falling fast while the Nationwide survey of house prices, usually one of the more robust indicators of how our homes are faring in value, suggests that the market has come to a dead halt. This should also be taken as helpful rather than accepted as a negative indicator. Aside from anything else, it might encourage some investors to return to the equity market – assuming the state of the US economy does not put them off, that is.

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