Talk of soft and hard landings has dominated the US economic landscape over the past couple of months but the consensus is moving towards the view that the US economy could be in for a very hard landing indeed.

The economy has slowed quite significantly, from more than 5 per cent in the first half of last year to little more than 2 per cent in the second half, and there are concerns that the economy could be entering into recession at the start of the new year.

In response, the Federal Reserve chairman, Mr Alan Greenspan, gave the economy and markets a belated Christmas present with a half percentage point cut in official interest rates yesterday. This should help alleviate the growing pessimism that was afflicting the US and should ensure it remains on a positive growth path.

The Fed is expected to sanction further rate cuts in the near future and this should underpin the economy and allow for a market recovery.

It is clearly evident that the past two quarters have been very difficult for the US economy with the stock markets performing badly, especially the Nasdaq, and this has adversely affected household wealth and thus consumer confidence.

US retailers have complained about a very disappointing Christmas sales period and resulted in most retailers starting the new year sales in December. Industrial activity has also weakened with various surveys pointing to a sharp fall in confidence and output.

The National Association of Purchasing Managers index is the bellwether survey of industrial activity in the US and this has been indicating a contraction in factory gate output for the last five months of 2000.

These factors were sufficient to prompt the Fed into acting to ensure that the US economy does not fall into recession. There are two important points to take from the statement the Fed issued accompanying the decision to cut rates. First, inflation should moderate in the coming year while core inflation should remain benign. This will allow the Fed to cut interest rates further in 2001, if so required. Thus the US equity markets are likely to get a further boost from monetary policy in the not-too-distant future.

Secondly, given the dramatic crash in the Nasdaq, it is very easy to forget the advances in technology that have been achieved and the higher productivity benefits these have bestowed on the US economy. Furthermore, the US dollar will weaken over the course of the coming year and this combined with lower oil prices should assist US corporations and help to alleviate some of the pressure on their profit margins.

The tightening of credit conditions that has occurred in the US over the past number of months, particularly for consumer credit, should be eased. While the first of the tax cuts that the Bush administration has promised will not be implemented until the end of the year, the expectation of these cuts will have a positive influence on consumer confidence and hence activity.

The US economy still faces a nervous few months and this will not suddenly push the economy to 4 or 5 per cent growth. What it does do is dispel the growing level of irrational depression that was gathering and prevent the country from talking itself into a recession.

The economy should grow by about 2 to 2.5 per cent on average through to mid-2001 and accelerate to above 3 per cent over the second half. Overall, this should form a reasonably positive backdrop for US equities and allow for a relatively strong performance in the coming year.

Pat O'Sullivan is an economist at Bank of Ireland private banking