US joblessness at lowest for four years

UNEMPLOYMENT in the US fell last month to its lowest level in four years, the latest in a series of strong reports on the economy that make a further rise in interest rates by the Federal Reserve virtually inevitable, possibly even before the next scheduled meeting of the central bank's policy-making body in mid-November.

According to the Labor Department, the headline rate of unemployment dropped to 5.9 per cent in September from 6.1 per cent, its lowest point since October 1990 and the start of the 'Bush recession' when joblessness stood at 5.8 per cent. Total payrolls, the most closely watched figure in the monthly report, jumped 239,000 last month, while August's total was revised upwards to 246,000 from 179,000.

The new data reinforces evidence that the economy, after faltering slightly in the spring, is now expanding briskly and may be close to the point where fresh growth automatically generates inflation. All the signs are that GDP continues to grow at around the 4.1 per cent rate of the second quarter, and perhaps faster.

For the time being, however, inflation, running at around 3 per cent, still appears under control. Although both the average working week and overtime hours increased slightly in September, average hourly earnings fell by a fraction. The economy was not overheating, Robert Reich, the Labor Secretary, said. 'My assessment of the figures is good. They are in line with expectations.'

The markets yesterday seemed to agree. Another widely feared surge in long-term rates did not materialise, as yields on the 30- year Treasury bond held steady at just below the psychologically important level of 8 per cent. By mid- session, Wall Street, which had been expecting a September payrolls increase of up to 300,000, was slightly higher.

New York headed higher as prospects of an imminent rate rise faded, with the Dow Jones Industrial Average closing 19.51 points ahead at 3,795.08. Wall Street's gains helped to push the FT-SE index of 100 leading London shares to within a whisker of 3,000. It ended 14.3 points above Thursday's close at 2,998.7.

The next key indicators will be the September price data and the third-quarter GDP estimates, due later this month.

With markets looking anxiously at the Fed for proof of its determination to tackle inflation, the smallest hint that output or prices are accelerating may prompt the central bank to push up short-term rates for the sixth time this year, without waiting for the scheduled session of the Federal Open Market Committee.

The markets were unmoved by the latest British trade figures. The deficit on trade with the rest of the world narrowed slightly between June and July, but City analysts were left divided as to whether the balance of payments was heading towards a surplus or approaching a turn for the worse.

The trade gap fell from pounds 729m in June to pounds 704m in July, according to the Central Statistical Office. Another improvement may be in prospect for August, with the trade gap with countries outside the European Union already known to have shrunk by pounds 122m.

The trade gap has been on a narrowing trend since the beginning of the year, helped by a rising surplus on trade in oil. Excluding oil and erratic items - such as ships and precious stones - the trade gap fell to pounds 1.27bn in July, the lowest monthly figure so far this year.

'The chances of the current account going into balance are increasing all the time', David Hillier of NatWest Markets said.