If you visit a General Motors (GM) or Ford car dealership in the United States today, you might have trouble getting service as the sales staff are so busy selling automobiles and pick-up trucks. Where is the recession, you might ask? The auto business is booming.

But take a closer look and you may also note that, in Ford's offices, lights are being shut off automatically to save costs and, at GM dealerships, the staff is so thin on the ground they have trouble keeping up with paperwork.

The reason consumers are rushing to buy automobiles is that the makers are offering zero financing in a desperate attempt to keep production lines moving. This is equivalent to a drop of nearly 5 per cent in the retail price of each car.

The offer affects profit margins so severely that GM, which has already laid off thousands of workers, is making even more savage cutbacks. And the rush is unlikely to last.

Many car buyers have simply brought forward their purchases, ensuring reduced sales next year when analysts estimated 14.5 million vehicles would be sold compared to the 15 million needed to break even.

Prices are also declining in the US for other manufactured goods such as computers and microchips, for commodities like coffee, copper and oil, and for services such as airline fares and hotel rooms. This has sparked a debate among US analysts as to whether the biggest danger in the $10 trillion (€11.4 trillion) US economy is now not recession but deflation.

This is the Japanese disease, and it is characterised by a pernicious decline in prices that could spiral out of control and lower national output and employment.

Deflation encourages consumers to postpone buying because they think prices will be lower tomorrow, which in turn depresses production, bringing about even lower prices. It discourages borrowing as the money devoted to monthly repayments gains more purchasing power as time goes by.

Deflation forces a company to cut the price of its products, and then dismiss workers and slash costs to meet loan repayments. If the company goes under, banks suffer the losses and become more adverse to risk. Meanwhile unemployed consumers cut back on spending, further reducing demand.

The worst bout of deflation in US history occurred in the Great Depression from 1929 to 1933, when consumer prices fell more than 20 per cent, unemployment rose to 25 per cent and 10,797 banks failed.

Deflation in Japan today came about as the result of a prolonged recession and no one now doubts that the United States is in its 10th recession since the second World War.

The Organisation for Economic Co-operation and Development warned on Tuesday that US economic activity would shrink by 0.6 per cent in the second half of 2001, and by 0.1 per cent in the first six months of next year.

We know already that the economy contracted by 0.4 per cent in the July-September period and that it cannot avoid shrinking further in the current quarter because of the after-shocks from September 11th, making two quarters of negative growth in succession and technically a recession.

It may not be a deep recession, or a very long one. Despite the horrendous statistics, the focus of commentary in the US in the past week has shifted from how deep the recession might be to how strong the recovery will be.

Stock prices have rallied to the point where they briefly entered bull market territory on Monday, and bond yields have risen more than 0.5 per cent in the past week, a sign that the Federal Reserve may not have to cut interest rates again when it meets on December 11th.

Inflation in fact has remained so low that the Fed may be tempted to act again, but after 10 rate cuts, the spectre of deflation has suddenly come to worry many economists more than inflation.

The signs of incipient deflation are already there for anyone who wants to find them. Consumer prices fell 0.3 per cent in October, the second time in four months, and the October producer price index, which tracks wholesale prices, dropped 1.6 per cent from September, the biggest monthly decline since 1947.

With Japan in recession, Europe slowing and US supplies stockpiled after 13 straight months of manufacturing decline, global deflation may be on the horizon, some economists say.

Deflation could occur in the United States now because of suppressed demand, warns economist Mr Stephen Roach of Morgan Stanley.

With inflation already at minimal levels, further pressure on prices could begin the downward spiral, he predicted. Consumers will say: "If you're going to be able to buy something cheaper six months from now, why buy it now?"

Mr Roach also argues that the recovery next year could be tepid because of vast overcapacity in technology and the fact that most would-be buyers are deep in debt. This could force companies to keep cutting prices long after a recovery has got under way.

"I've spent a whole career looking under every rock for the next wave of inflation and I've run out of rocks," he said. "We're going to get a lot closer to deflation than people think."

Deflation fears are downplayed by some other economists who argue that lower prices and interest rates leave consumers with more money to spend on other things.

They also point to the ever-rising expense of services in the United States, which keeps the cost of living from falling. Medical care has gone up 4.7 per cent in the past year, car repairs 3.4 per cent and television cable services 3.8 per cent.

House prices, the cornerstone of personal wealth, are still rising. Coffee beans have fallen on the world market but a cup of coffee still costs the same in a Starbucks cafe.

While prices in many areas declined in the 1990s, deflation was never a threat because demand for products and services kept climbing, and it is not a real threat today, argues economist Mr Edward Kerschner at UBS Warburg.

"Today's recession sets up tomorrow's recovery," he said. "Improvements and innovations will continue, populations will grow and spending pressure builds up again."

Mild deflation can even be good, argues Mr Sung Won Sohn of Wells Fargo, especially if oil prices remained below $20 a barrel for a year, which would increase the spending power of businesses and consumers by more than $100 billion.

"I think the likelihood of a full-blown deflation in the United States is about nil," said Mr Mark Zandi of Economy.com, a forecasting service.

"Half the things we buy are services that are based on labour costs," he said, and wages were slowing but not falling.

While this is true nationwide, wages are already declining in some sectors, such as the car industry. Take the case of Ms Beth Ardisana, who runs a firm that supplies contract labour to Ford Motors.

This week she had to tell her 150 workers that their wages will fall 7 per cent, the Wall Street Journal reported, because of an instruction from Ford that all its supply companies should reduce their billing rates by 7 per cent to help the auto-maker conserve cash.

For such people, deflation is here already.