This turn-around from recession was helped initially by the inventory cycle, but it has been underpinned by resilient consumer spending, which itself has been encouraged by the strength of the housing market, offsetting some of the negative wealth effects of lower equity prices. Meanwhile manufacturing output recovered - notably in the semiconductor, computer and communications equipment sectors - and investment appears at least to be no longer contracting. Certainly the macro-economic data are mixed - they almost always are, but on the whole they remain reasonably positive. More fundamentally, the financial system - notably the commercial banking system - has held up well, far better than one might have expected through the slowdown. Market interest rates have fallen where they were pointing higher earlier in the year. And perhaps most importantly, although there has been some deterioration in the labour market, average annual productivity growth has remained strong - at around 2½% since 1995, well above the 1.5% rate averaged over the preceding 20 years. At current growth rates that means there is no inflationary pressure - and both monetary and fiscal policy remain supportive, indeed US monetary policy was eased quite sharply further last week to underpin the expansion. All in all, we - along with many other macro-economic forecasters - expect that after somewhat slower growth in the 4th quarter - US GDP will continue to expand at an annual rate of 3-3½% over the next two years.
That's not a massive rebound, but it is a positive picture - even allowing for downside risks. So we are, in fact, seeing - in terms of Turandot's first riddle - the renewal of the US economy. And of course it is  BIS Review 64/2002  1  immensely important for the global economy that we should, because the prospects in some of the other major industrial economies, notably Japan and Germany, are rather more uncertain. Surprisingly in the light of all this, Turandot's own answer to her first riddle was not "the US economy." Her answer was HOPE. I suppose I would settle for modest EXPECTATION. Her second riddle was "What flickers like a flame when man dreams of conquest?" And again, as I sat there, the answer seemed obvious - it had to be business and financial confidence - or perhaps the global equity market. Given the macro-economic prospect in the US - which is expected to contribute to a recovery to neartrend growth in the world economy as a whole in the course of the next year or two - the recent pessimism of business leaders and the renewed nervousness of global equity markets over the summer seemed somewhat puzzling. Fear seemed to have taken over from man's dream of conquest! There was a real puzzle before the equity markets started to decline.