US interest rates set to rise early in 2010 after better news on jobs

Published on Friday 4 December 2009 21:28

A NEW year rise in United States interest rates was on the cards last night, after it emerged American employers had made the lowest number of job cuts since the recession began two years ago.

The surprise government data, which showed a net 11,000 jobs lost in November, only a fraction of the 130,000 predicted, sent the dollar soaring and fuelled talk of an early rise in US interest rates.

Analysts said currency traders were pricing in the possibility the US Federal Reserve could hike borrowing costs as early as the second quarter of 2010 if the job market continued to improve.

Although such a move would increase pressure on the Bank of England to consider a rate rise in the UK, the economy here remains in a more perilous state. With unemployment set to rise through much of next year and GDP growth likely to be stifled, most economists expect UK rates to remain at their record low of 0.5 per cent for the foreseeable future.

Despite a fairly positive reaction on Wall Street and in London, where the FTSE 100 index closed 9.36 points higher at 5,322.36 after a see-saw session, many analysts urged caution.

Jason Schenker, president of Prestige Economics, described the US employment report as "surprisingly good" but said he believed it was a "blip".

"The worst is not behind us – at least not for the job market," he said.

Howard Wheeldon, senior strategist at BGC Partners in London, said: "We caution against seeing the slight improvement as a marker that economic recovery is any further forward than it was this time last month.

"Indeed, we see little if any evidence within the statistics of new job creation and note that September and October payrolls had been upwardly revised by 159,000."

US payrolls have fallen every month since the onset of recession in late 2007, but the pace of decline has slowed in recent months.

The latest data from the US Bureau of Labour Statistics showed the headline rate of joblessness stood at 10 per cent at the end of last month, down from 10.2 per cent in October.

For an economy the size of the US, last month's net loss in jobs was so small that officials described the joblessness total as "essentially unchanged". While a number of sectors, including professional and business services, actually added jobs, others fared less well. Manufacturers, for example, shed some 41,000 posts between October and November.

Separate figures showed orders to US factories unexpectedly rose in October, the sixth gain in the past seven months.

Orders were up 0.6 per cent during the month, according to the US Commerce Department, much better than the flat reading that economists had expected.

Closer to home, the Office for National Statistics revised up UK construction output data for the third quarter, in a surprise move that could add 0.2 percentage points to the last published Q3 GDP estimate.

The revision is likely to haul the Q3 figure back from recessionary territory and will be a boost for the government, which is forecasting a return to growth by the end of the year.

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said: "Even allowing for the fact that the construction sector only accounts for 6.3 per cent of national output, this substantial upward revision has significant implications for the overall economy's performance.

"It now looks like the economy was on the brink of stabilising in the third quarter."