This may be the month that decides the outlook for the economy for the next two years. The miserable figures from the US Labour Department show how quickly the problems of the sub-prime mortgage crisis have gone beyond the financial markets and leeched into the real economy.

In the short term, the fall in employment make it almost certain that the US Fed will cut rates by at least a quarter of a percentage point on September 18. The prospect of an even weaker dollar – say a pound at $2.10 – is more likely. And, looking out towards 2008, even sanguine economists are saying there is now a 50-50 risk of a recession in the US.

The question for the UK is whether the American economy will put a drag on the British economy, even as it wrestles with the uncertain fallout of the continuing financial market turbulence.

To be sure, the British housing market is more robust. The global economic climate remains benign. The repricing of credit is healthy. So, as a wall of commercial paper comes due in the second half of September, the mismatches of short-term borrowings to fund long-term lending could, with a little pain and restructuring, be ironed out.

But there is also the possibility that the recent liquidity crisis becomes a broader squeeze on credit. As the commercial banks have warned the Bank of England this week, their balance sheets and Britain’s family finances are not that far apart.

Unknown risk in the credit markets has already prompted banks to hoard money to meet their own debt obligations. Interbank borrowing rates have risen. Higher borrowing costs will, ultimately, be borne by customers holding personal loans and mortgages.

This has the potential to dent consumer spending. The banks’ pleas for more liquidity and cheaper credit are, of course, laden with self-interest.

Still, the scenario they paint of a negative spiral is, if not probable, possible. It will be a critical few weeks not just for the credit markets but for the economy as a whole.

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