ECONOMIC SLOW DOWN

Economist.com:

EVERYONE knows that America's economy is slowing. Thanks to the bursting of the housing bubble, overall GDP growth has fallen back sharply. The biggest short-term uncertainty for the world economy is whether American consumers stop spending and drag the country into recession. But beyond the business cycle, another slowdown has received scant attention. America's potential rate of growth—that is, the pace at which annual output can expand without pushing up inflation—is also falling. By some estimates, it could drop to 2.5% over the next few years, which would be the slowest pace in over a century.

If that happens, the consequences will be serious. Tax revenues will grow more slowly than expected. Monetary policy will become harder to manage: as the 1970s showed, inflation can get out of control if central bankers do not realise that an economy's speed limit has fallen. Financial markets will be disturbed as conventional wisdom adjusts from an assumption of 3-3.5% potential output growth, and investors downgrade their expectations.