US jobs figure that triggered Fed's rate cut 'was a mistake'

The surprise decline in US employment in August, which triggered a stock market panic and gave the Federal Reserve cover for a dramatic half-point interest rate cut last month, turns out to have been a mistake.

The government revised its recent employment figures yesterday and said that rather than a 4,000 reduction in the number of jobs in August, the US economy in fact created 89,000 new positions.

And in its first estimate of the labour market since then, it said employment rose by a further 110,000 in September, beating Wall Street forecasts, triggering a temporary rally from the dollar and sending the US equity markets back towards record territory.

Economists blamed the big revision of the earlier figure on the difficulty of collecting data on teachers returning to the workforce after a break over the summer, and they said the strength of the September data made it more likely the Federal Reserve may pause before any further rate cuts.

Kevin Logan, economist at Dresdner Kleinwort in New York, said: "I think the Fed was prepared to cut rates even before the August jobs report but it is possible that the employment data may have tipped them into the 50-basis point cut – the jobs weakness of the last two months was certainly exaggerated, but what we really want to know is what the trend is, and that is still down."

Employment fell in the construction industry because of weakness in the housing market, and manufacturing and retail also shed jobs, but there was stronger-than-expected growth in the services sector and government jobs. The data raised confidence that the ultimate economic effects of the summer credit crisis may yet be contained.

Federal Reserve vice-chairman Donald Kohn yesterday shifted the focus back to longer-term inflationary pressures. In a speech to the Philadelphia Chamber of Commerce, he said: "Once we get through the near-term weakness caused by the extra downleg from the housing contraction and any spillover from tighter credit conditions, I am looking for moderate growth with high levels of employment," he said.

The dollar initially jumped on the jobless news, as futures markets suggested increasing uncertainty over a second interest rate cut at the Fed's next meeting on 31 October. However, the greenback closed only flat as traders noted continued selling from Middle Eastern and other investors. Earlier this week, the Qatari government said it had scaled back its dollar investments and reports said Vietnam was switching some holdings into euros. The Dow Jones Industrial Average closed up 91.70 at 14,066.01 and the broader S&P hit a new all-time high.