US interest rate decision complicated by improved jobs figures

A hotly anticipated job market survey suggested that the US economy is more robust than expected, sparking a stock market rally and giving heart to those who predict the country will avoid a recession.

The US economy created 189,000 jobs in November, according to an estimate yesterday by the payroll-processing firm ADP, which is regarded as an important predictor of official employment figures, out tomorrow. The survey helped the Dow Jones to rise 1.5 per cent.

The official figures are viewed as being so important that they could make the difference between a quarter-point and a half-point cut in interest rates when the Federal Reserve meets to decide its next move next week.

The ADP estimate of new private-sector jobs was three times higher than expected, suggesting that many parts of the US economy are not feeling the impact from the housing slowdown. Two Fed interest rate cuts since September may also be propping up activity, economists said.

The figure of 189,000 was stronger even than the upwardly revised 119,000 figure for jobs created in October, and led some economists to rethink their gloomy predictions for the official figures due from the Department of Labour tomorrow.

But others cautioned the ADP survey is a fairly new measure of employment and has sometimes varied from the official figures it is meant to foreshadow by more than 100,000. Steven Wieting, at Citigroup, said he continued to expect a rate cut from the Federal Reserve on Tuesday. "While a strong employment gain in November might complicate the Fed's policy discussions next week, the forward-looking concerns in the financial sector will weigh on the economic outlook, rather than recent economic history."

The Fed is expected to cut rates to offset the rising cost of lending between banks. With spiralling losses on US sub-prime mortgages and related investments, banks' balance sheets are under pressure, and they have become less willing to lend to each other, a fact that threatens to reduce the availability of capital and raise the cost of borrowing for businesses.