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US jobs strength sparks interest rate fear

THE US economy generated 310,000 jobs in July, the Labor Department reported, far more than economists had anticipated. The strength of the jobs market fuelled fears that American interest rates could rise again soon.

Manufacturing employment rose for only the second time in 16 months. But the main surge was in the service sector, with temp agencies, restaurants, the hi-tech sector and engineering all experiencing increases.

Ominously for interest rate prospects, average hourly earnings jumped 6 cents, or 0.5 per cent, to $13.29. Pay growth has accelerated since the spring.

There are few signs of rising prices so far, but pay rose much faster than productivity in the second quarter of 1999, figures released earlier in the week showed. Productivity rose by 1.3 per cent compared with a revised gain of 3.6 per cent in the first quarter, while unit labour costs rose 3.8 per cent compared with a revised rise of 0.8 per cent.

Productivity gains are still higher than unit labour cost increases year- on-year, but financial markets fear that the trend leaves the authorities little option but to raise interest rates. This, certainly, was the advice of the International Monetary Fund, which published its annual assessment of the US economy on Thursday.

The bond market, which had been boosted earlier in the week by plans for a buyback programme, slid rapidly with the yield on the 30-year Treasury bond falling to 6.12 per cent. But there was a muted reaction in the stock market.

The US central bank increased interest rates by a quarter of a point at its last meeting in June. It next meets on 24 August.

President Bill Clinton yesterday nominated Roger Ferguson, a Fed board member, as Alan Greenspan's new vice-chairman, filling a vacancy created last month. Mr Ferguson will be the first black American to hold the post if he is confirmed by the US Senate.