Consumer woes to prompt US rate cut despite jobs data

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The Independent Online

The US Federal Reserve remains likely to cut American interest rates next week, despite better-than-expected job growth figures which yesterday eased concerns that the housing slump will push the economy into a full-blown recession.

Official statistics showed employers in the United States added 94,000 jobs to their payrolls in November, with the unemployment rate holding steady at 4.7 per cent and wages growing relatively briskly. Economists said the figures offered encouraging signals that employment and consumer spending may hold up in the face of the turmoil in the housing, credit and, more recently, equity markets.

The data was better than anticipated by economists, who had forecast that the unemployment rate would nudge up to 4.8 per cent and that employers would boost payrolls by around 70,000.

Recruitment was healthy in education and health services, retail and the professions, offsetting losses in construction, manufacturing and financial services. The 94,000 new jobs followed a surprisingly strong payroll gain of 170,000 in October. Average hourly earnings rose to $17.63 (8.68) in November, a 0.5 per cent increase from the prior month, the biggest monthly gain since June. The increase boosted annual wage inflation to 3.8 per cent.

The Federal Reserve has previously indicated the payroll numbers (excluding seasonally erratic farm-sector data) would be a crucial piece of evidence ahead of Tuesday's decision on interest rates, but the upbeat report is unlikely to derail pressure for a cut.

The prospects for the US economy remain uncertain, and economists remain unanimous that 2008 will see much lower growth, falling from an annualised rate of almost 5 per cent a year to closer to 1.5 per cent in 2008.

The latest consumer confidence data, also published yesterday, showed morale has dropped by more than forecast to the lowest for more than two years in December as fuel costs surged and worries about the housing market persisted. The Reuters/University of Michigan preliminary index of consumer sentiment fell to its lowest level since the October 2005 reading following Hurricane Katrina.

Factors depressing the mood include the rising cost of gasoline and heating oil, that borrowing has become tougher and that lower property values have constrained opportunities to draw on home equity. The report raises concern consumer spending, which accounts for more than two-thirds of the US economy, will slow further.

Nevertheless, economists were relieved by the jobs figures. "This is reassuring the pillar continuing to support the economy is job creation," said Carl Tannenbaum, chief economist at LaSalle Bank.

US economists are anticipating a quarter-point reduction in interest rates next week.

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