US data revive rate cut hopes

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The Independent Online
New evidence of economic weakness revived flagging hopes that the Federal Reserve will cut US interest rates later this week, writes Diane Coyle. The last indicator to be published before the Fed's policy committee meets suggested that industrial output is still falling and the economy is close to recession.

"There is no evidence that the decline in manufacturing is bottoming out. It raises the odds the Fed will move," Josh Feinman, an economist at Bankers' Trust in New York, said. Others still thought a wait-and-see decision more likely. David Bloom, US economist at James Capel, said: "The economy is precariously balanced and any attempts at fine-tuning at this stage will only serve to undermine the Fed's credibility."

Views about how the Fed will react to recent statistics have see-sawed during the past two weeks. The broader indicators have indicated a sharp slowdown in growth between the first and second quarters, but there has been more buoyancy in areas like the housing market, which have reacted to lower long-term interest rates.

The National Association of Purchasing Managers index of activity fell to 45.7 in June, rather than recovering as expected. It was the second month the index was below 50, indicating a decline in industrial output. A level of around 45 is taken as the dividing line between recession and recovery.

The output index fell, although new orders rose a fraction thanks to export orders. The employment component of the index recovered, but was still under the 50 mark, suggesting job reductions for the fourth month running. The employment report due on Friday will bring official jobs figures, but analysts had been predicting an increase of about 125,000 in the number of jobs after shock declines in the previous two months.

The good news was that price pressures diminished. The prices paid index is significantly lower than it was six months ago.

Separate figures on personal income and spending showed that incomes fell in May for the first time since January 1994, although after-tax incomes increased. Consumer spending increased in line with expectations.