Surge in US growth and home sales take shine off Wall Street

The American economy revealed its unexpected strength for the second time this week, crowning Bill Clinton's nomination for the presidential race at the Democratic Party convention in Chicago.

A big upgrade to the estimated pace of growth in the second quarter of the year and a surge in new home sales in July sent shares on Wall Street and Treasury bond prices tumbling. In London the FT-SE 100 share index ended nearly 34 points lower at 3,885, back below the 3,900 level it breached last week, as a result.

The surprisingly buoyant economic figures would make the Federal Reserve more inclined to increase interest rates after its next policy meeting on 24 September, analysts concluded.

Brian Fabbri, an economist at Paribas Securities in New York, said: "If the August employment figures are also strong they will move then, even though it is before the election. If the economy is in such great shape it leads to the conclusion that Clinton cannot lose."

Many experts have been predicting a slowdown in the second half of the year, but recent indicators have been surprisingly robust. Earlier this week consumer confidence returned to a six-year high. Sales of new single- family homes jumped 7.9 per cent in July. The previously reported June decline was revised from a whopping 5.3 per cent originally to a more modest 1.8 per cent.

The average price of a new house rose 2.7 per cent during July. Overall, annual US house price inflation has been running at about 10 per cent.

According to yesterday's revised GDP figures, the US economy grew at an annual rate of 4.8 per cent in the April-June quarter. This was the fastest rate for two years. It compares with the original estimate of 4.2 per cent and a mere 2 per cent in the first quarter.

The unexpected revision was due to several factors, particularly higher investment and stronger government spending. Some economists argue that these increases will not be sustained, causing growth to slow in the second half of this year.

"The question is whether it will slow down quickly enough to avert an increase in interest rates. It will be a close-run thing," said Mark Cliffe at HSBC Markets.

Analysts who expect the Fed to leave policy unchanged focus on recent comments by the chairman, Alan Greenspan, suggesting the favourable inflation outlook is an important factor.

However, the uncertainty about the Fed's next move has put the spotlight once again on the monthly employment figures, due today.

Job creation in July was weaker than expected, but the August figure is likely to be high, partly due to hiring related to the Olympic Games.

The Dow Jones index closed nearly 65 points lower at 5,647.65. The benchmark long Treasury bond fell by about three-quarters of a point, taking the yield up to 7.04 per cent.