The chairman of the US Federal Reserve, Mr Alan Greenspan, sent a message to the world leaders' meeting in Genoa today at the G8 summit. The US economy is bottoming out but it is still dead in the water and, in its present state, cannot be counted on to prevent the world slowdown getting worse.

Despite aggressive rate cuts totalling 2.75 per cent since early January, stock prices are still down this year on Wall Street, long-term interest rates are higher and the dollar has got stronger, hammering US exports. Manufacturing in the United States has declined steadily and unemployment is rising. Inventories in some US industries, particularly high-tech and communications, remain bloated.

Real GDP growth over all four quarters of this year, Mr Greenspan warned, will be as low as 1.25 to 2 per cent, a figure that startled leading US economists who, in a mid-year survey last month, forecast growth would rise to 3.1 per cent for the year.

"Towards the end of the year we will see things improving," Mr Greenspan forecast but the risks remain "tilted" towards more weakness, and the economy is "still weak and still deteriorating", although at a slower rate than before.

The best that could be said is that the danger of recession in the US appears to have passed.

"The economy is doing not well but far better, given what happened, than I would have forecast six months ago," the Fed chairman said.

What has prevented the US slipping into recession has been consumer spending, which drives two-thirds of the economy. Despite the unrelenting barrage of bad news, consumer confidence is actually more robust than in January.

Americans' expectations that things will get better have risen from six months ago. The housing market is more brisk than this time last year and house prices are 8 per cent higher. Car sales are significantly higher than at the end of 2000.

All told, consumers are spending more now than at the start of the year. This is partly because the full effects of rising unemployment have yet to be felt.

The US unemployment rate of 4.5 per cent is still at an historic low. More lay-offs are inevitable and the unemployment rate could reach 5 per cent by year-end, Mr Greenspan warned.

Many struggling tech companies, recalling the acute skills shortage of a year ago, are trying to hold on to specialised staff and are cutting costs in other areas, such as entertainment and executive travel. Nevertheless, unemployment will not stop rising until growth reaches 3.5 per cent, which could be late next year.

The interest rate reductions have also affected consumer spending. Lower mortgage rates have encouraged refinancing, which has enhanced disposable income. Of US home-owners, 10 per cent have extended their mortgage this year. Credit-card interest charges have also eased. In addition, President Bush's tax refunds will give households a bonus of up to $600 (#691) in the coming weeks, putting $38 million into Americans' pockets.

Almost as important, oil and gas prices have fallen. The average price of a gallon of petrol has fallen 13 cents in three weeks to $1.51.

The risks to recovery in the US slowdown are concentrated almost wholly in the business sector. Corporations have slashed capital spending to lift earnings and orders to tech companies have virtually dried up. Growth of investment in equipment and software has turned decidedly negative and manufacturers are still scaling back production to stem the accumulation of unwanted inventories.

Profit warnings from US companies this week continued to run close to the record set in the first quarter, with 850 companies forecasting reduced revenues and earnings. Semiconductor chip makers will see their industry decline more than one-third this year, according to an industry survey. In recent months many big companies such as Intel, AT&T, Cisco Systems, Lucent Technologies, Nortel, Walt Disney, Wells Fargo and American Express have announced huge write-offs and charges to earnings, slashing the book value of investment portfolios and acquisitions, and tech stock prices have crashed by 67 per cent.

The G8 leaders in Genoa are faced with the fact that the economic slowdown, which began in the US tech sector last year, has spread across the globe, creating economic weakness that could rebound on the United States. This would kill any prospect of a V-shaped recovery and increase the danger of a world recession through contagion. Japan is dangerously close to recession, Singapore is already there and growth is slowing in the European Union.

Because so much of world trade revolves around the US, no region is immune. Mexico depends on exports to the US for 25 per cent of its economy, Canada 32 per cent and Asian countries (other than Japan) 40 per cent.

The increasing globalisation of the world economies means that the degree and speed of the US slowdown affected growth in countries such as Germany more quickly than economists anticipated. Global GDP growth stalled in the quarter just ended, the weakest performance in a decade, and is expected to reach only 1.5 per cent for the year.

"The principal risks to the US economy are now global," said Mr Jerry Jasinowski, president of the National Association of Manufacturers.

Growth in world trade now accounts for one-quarter of the global economic output - twice that of a decade ago. It has shrunk however to 2.3 per cent from 12.9 per cent a year ago, turning in the weakest performance since 1983, according to JP Morgan in New York.

JP Morgan cautioned that "those who are counting on the US to be the engine of global recovery are likely to be disappointed by the modest US rebound ahead".

At the same time, it predicted that "the US economy is poised for a second-half rebound based on stable consumer spending, an end to the recent record-high inventory cutbacks and the beginning of a manufacturing recovery".

Mr Greenspan's downbeat assessment of second-half growth has taken the gloss off the most optimistic predictions emanating from the meeting of G8 finance ministers in Rome last week, who predicted that the global economy could be pulled out of its slide by a resurgence in the United States. There remains however the thorny problem of the strong US dollar.

The dollar is currently at a 15year high. It has risen 30 per cent against world currencies in the past four years, and this year is up 8.4 per cent against the yen and 7.3 per cent against the euro. With the US economy avoiding recession, the prospect for a significant slide in the dollar in the near term has diminished.

Its closest competitor, the euro, is still a virtual instrument of exchange, and the dollar remains the most attractive world currency, with US inflation remaining low and the prospect of productivity gains occurring there earlier than elsewhere.

Moreover, US equities are outperforming equities in Europe and elsewhere.

The Bush administration will not take any measures to lower the dollar's value, despite appeals from manufacturers and the AFL-CIO union, and despite the fact that a strong dollar undermines the effect of the rate cuts. Mr Greenspan said in so many words that it was up to other countries to improve their performances and make their currencies stronger.

After the Asian economic crisis in 1998, a booming US economy pulled the world back into a period of unprecedented growth. If US consumers continue to spend there is hope that, as Mr Fred Bergsten, director of the Institute of International Economics, put it, the US could pull the rest of the world "out of the doldrums".

But the language used by Mr Greenspan in his testimony to Congress on Wednesday was not designed to inspire optimism of a quick recovery.

"We see signs that the bottom is beginning to restructure itself," he said.

"I think if I had to make a forecast I would say that towards the end of this year we will see things improving, and clearly so next year."

His main hope that this will occur is that US consumers keep spending as if there is no tomorrow.