Mixed signals in US confuse the markets

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Economics Editor

Mixed signals on the state of the US economy marched American financial markets up and down the hill.

A much stronger-than-expected figure for employment growth in August disconcerted the bond market and helped the dollar. A weaker-than-expected reading on the purchasing managers' view of the state of the manufacturing sector then caused the reverse, with US Treasuries regaining the ground they had lost and the dollar falling back to close in Europe down on the day.

The figure that rattled bond dealers was the increase of 249,000 in non- farm payrolls. The market consensus had been for a much more moderate expansion of about 160,000 to 170,000. The headline total suggested the economy was growing faster in the third quarter than had been thought, so increasing the odds against an easing of policy by the Federal Reserve when the Open Market Committee next meets on 26 September.

However, as analysts probed the details of the employment report, they became less worried. For one thing, the Labor Department revised down the July growth in employment from 55,000 to just 6,000, although this was offset by an upward adjustment to the June figure. More important, average earnings showed a small decline, as did hours worked.

Commenting on the figures, Joseph Stiglitz, chairman of the Council of Economic Advisers, said: "GDP growth will likely be moderate in the third quarter of this year."

That view gained support with the release of the purchasing managers' index which caught the markets off-balance on the other foot. The overall index which guages the level of manufacturing activity fell unexpectedly from 50.5 in July to 46.9 in August. Any reading below 50 indicates recession in the sector: Wall Street had expe- cted the index to rise slightly.

The prices component of the index also fell sharply, from 58.3 to 48.0, indicating the first reduction in prices for almost two years.

The bond market promptly did a handbrake turn that would not have disgraced a joyrider, recovering all the ground - and more - it had earlier lost on hopes that the Fed might relax rates after all. Similar reasoning then drove the dollar down.