The US third quarter growth numbers surprised the optimist, let alone the skeptics. To put this in perspective, it was the highest rate of quarterly growth that the US has seen in two decades. The economy was evidently firing on all cylinders, the consumers went rampant on a buying binge with their wallets replenished by tax credits and cash in hand from lower tax bands. This time they went beyond the perishable to the durables, fridge-freezer, dishwasher, cars et al, not to mention few house purchases too. All these activities brought inventory levels of durable goods down to its recent lows. What also provided a fillip to the growth is a rise in business investment, for the first time since the bubble burst. The over-capacity created by the roaring nineties had so far ensured that no fresh business investment was needed to cater for the current demand. Existing capacity could take care of it. Which is why new corporate investment was scarce, and provided no boost to the flagging economy. However this seemed to have turned around in the third quarter when investment in equipment and software rose by 15.4 per cent, the strongest rate since the first quarter of 2000. This is really the silver lining to an otherwise cloudy picture.

So far the engine of US growth was the consumer, who had demonstrated an intermittent show of purchasing power, but demonstrated greater strength at the back of tax break in the third quarter. On the other hand revival of business investment that was till now lacking, has a tone of permanence and a long term perspective to it. Corporates invest when they see light at the end of the tunnel. Therefore the sudden spurt of activities from the corporate sector bodes well as they evidently see a brighter future.

In addition to business investment, employment is the other area where things are brightening up too. New positive trends are developing in job generation. Employment is no longer growing in the traditional fashion with established companies, instead small and medium sized entities are mushrooming, picking up all the outsourcing contract that the big companies are doling out fast to reduce cost. This is very encouraging, confirming the big push in business process outsourcing that is shaping the employment landscape of the future.

The million-dollar question on everyone's lips is, will it last? The prediction for the fourth and final quarter of 2003 has already been marked up to just above 4 per cent, inevitably down from the dizzying heights of the previous quarter. But what about 2004 and beyond?

My guess is the US Federal Reserve and the US Treasury have almost run out of options to pump prime the economy. So far the tax breaks and historically low interest rates have managed to shore up the economy, by leading consumer to borrow at enticingly attractive rates and spend irresponsibly. Also the largesse offered through tax breaks, when the budget deficit is already at a high level, appears nothing less than desperate measures.

There are numerous fault lines which make one wary of the future. The budget deficit is precariously high at 5 per cent of GDP and most of it is funded by the reserve money from Asia; principally with Japan and China. What if these Asian giants decide to hold back their investment in US Treasuries (US Government debt obligations) and diversify elsewhere? One scenario is that this could precipitate higher US interest rate to get money flowing back into the Treasury market. The concomitant result could be a cascading effect on consumer confidence, which so far has been the cornerstone of US economic resilience. The other imbalance is the current account deficit, which is equally high at 5 per cent of the GDP. This deficit has been steadily growing, caused primarily by high imports. In the late nineties this high merchandise import was counterbalanced by the private investment flow into a buoyant stock market. This activity has inevitably tapered off and instead, replaced by a similar investment flow, but of a different nature -- Asian central bank reserves buying US Treasuries (US Government debt obligation). Had these counter-flows not been there, US dollar would not have sustained its strength as long as it has. Evidently, in both the above cases, it is a precarious balance supported by foreign money. This naturally takes away some of the policy independence of the Federal Reserve and the US Treasury.

The third fault line is the US equity market. Once again it is beginning to look frothy. Some valuations are at historic highs, defying fundamentals and the tech sector is almost on the boil again. The culprit is excess liquidity in the economy. Lax monetary policy of very low domestic interest rate has led to a rapid growth in money, which needed a home for investment. For long, mutual funds had sat on the side line in cash, but with 9-11 shock and war risk premium in the distant past, money has again started to flow back in the equity market. Especially, as alternative investment return looks dire. This is causing equity valuation to veer up from fundamentals to new heights.

Notwithstanding, it is commendable to see the US economy responding so favourably after having in the last three years suffered the largest bout of wealth destruction in global history. It shows resilience and indomitable strength of the US economic engine. And if this growth sustains than it would be the shortest recession in the past 50 years.

What happens to US economy is also relevant to Bangladesh, especially for the garment sector, it being the largest exporter group in the country. The US market is responsible for at least 40 per cent of total export, mainly consisting of garments. Interestingly, the garment sector despite anemic growth in Europe and intermittent growth in the US (its two main export markets), has been able to keep up the momentum. First quarter of this fiscal year the garment sector saw a rise in export of 12.6 per cent. One explanation maybe, that Bangladesh clothing products are at the low to lower middle end of the spectrum. This ensures that despite economic slowdown in the export markets, demand fails to contract as it caters to minimum needs of the western consumer. Paradoxically the demand should rise as more enter this basic need band from the higher consumer group than people falling off the band.

The US is a formidable economic engine, which matters immeasurably to rest of the world. There is no other economic power that can match its strength. Much as we would like it to keep on chugging, the drivers of growth are yet to see a clear path ahead.

Ghalib Chaudhuri, a former investment banker, is managing partner of Octavian Associates, an independent consulting practice based in Singapore.