Spectre of US double dip haunts investors

Americans buy gold and bonds after business investment and consumer spending disappoint

Evidence that the US economy may be tipping into a second slowdown spooked investors over the Christmas period.

Evidence that the US economy may be tipping into a second slowdown spooked investors over the Christmas period.

Disappointing durable goods orders in November suggested a further weakening in business investment just as a survey said US retailers were having their worst Christmas in more than 30 years. US investors sold shares and bought government bonds and gold in the truncated trading session on Christmas Eve, with no immediate end to the economic gloom that has contributed to a third negative year for stock markets.

Items for durable goods – anything from tools to computers to aircraft – fell 1.4 per cent in November and the month-on-month rise in October was revised down to 1.7 per cent. Economists had been expecting the November figure to show a rise of 0.8 per cent.

Dana Johnson, of Banc One Capital Markets in Chicago, said: "These durables are the most cyclically sensitive part of the manufacturing sector, and this reinforces the sense that nothing good is going on right now in the manufacturing sector. This is the classic part of the economy where you have postponable decisions, postponable spending."

The Dow Jones Industrial Average closed for Christmas down 45 points at 8,448.11, as disappointment with the durable goods numbers was compounded by a new survey on US consumer spending.

A report by UBS Warburg and Bank of Tokyo-Mitsubishi showed store sales last week, including the final weekend before Christmas, were up just 1.7 per cent on last year. The total forecast sales increase for November and December is 1.5 per cent, the worst number since 1970.

In the UK, anecdotal evidence of pre-Christmas discounting sent retail sector shares tumbling. On Monday, a survey of footfall in shopping centres and on the high street showed shoppers had stayed away last week.

The Federal Reserve and the Bank of England, in common with central banks around the world, have brought interest rates down aggressively to buoy consumer spending and trigger a rebound in business investment, but investors fear consumer confidence could decline before investment returns to boost growth.

The world economy will enjoy only a modest recovery over the next two years, economic forecasters said today. The Centre for Economics and Business Research said world GDP growth would rise from 2.1 per cent in the past year to 2.3 per cent in 2003 and 2.7 per cent in 2004.

The strength of the oil price has stoked concerns over corporate profitability. Moves towards war in Iraq, and the latest diplomatic stand-off between the US and North Korea, has sent the price of Brent crude to 15-month highs, although it eased a little on Tuesday. The price of gold, always a bolt-hole for nervous investors, has risen to its highest level since 1997.

Doug McWilliams, the CEBR report's author, said: "The main uncertainly is the possible war with Iraq. While war remains a possibility, the price of oil will stay up, squeezing consumers' disposable incomes."

The CEBR's latest quarterly forecasts represent a small reduction in their estimates for Western Europe, which is now predicted to grow only 1.4 per cent in 2003.