Fall in US unemployment brings unexpected cheer

THERE was unexpected cheer in US economic news yesterday when the Labor Department revealed that the rate of unemployment last month fell marginally to 6.9 per cent, the lowest level since November 1991.

Though the decline was small and vulnerable to reversal in the months ahead, it provided a strong psychological boost to recovery hopes and came as a surprise to analysts, who had widely expected unemployment to remain at 7 per cent, where it had been stuck for three months.

However, some observers believe the rebound could bring on higher inflation. John Lonski, an economist at Moody's in New York, said consumer prices this year could rise as much as 3.5 per cent from 2.5 per cent last year, prompting the Federal Reserve to tighten monetary policy.

Behind the improvement was an impressive 857,000 leap in job numbers, the biggest one-month increase in nine years. The largest contributor to the surge was the construction industry, which registered a payroll expansion of 67,000. Builders have experienced a sudden rush of work, spurred in part by the country's lowest interest rates in two decades.

However, there were other developments yesterday tempering any optimism about short-term economic prospects. Most notably, factory orders showed a 0.3 per cent fall for April following a 1.6 per cent drop in March. This was also a surprise - most observers had expected a small gain.

At the same time, the largest US retailers reported that sales during May remained uncharacteristically weak, apparently reflecting a continuing lack of confidence among consumers.

The small drop in the unemployment rate does not disguise the fact that this recovery, officially under way for 18 months, has been one of unprecedented weakness.