A string of stronger-than-expected US economic data revived inflationary fears and sent financial markets lower yesterday, as investors worried that the Federal Reserve might have to raise interest rates this year. The Labour Department announced that 316,000 jobs were created in July, sending the unemployment rate down to 4.8 per cent - a 23-year low.
Together with a buoyant purchasing managers' report and a jump in factory orders, the data prompted Wall Street to reconsider its sanguine view on inflation and interest rates.
Reassuring words on price pressures from Mr Alan Greenspan, the chairman of the Federal Reserve, in his recent Humphrey-Hawkins testimony to Congress, had sent bond yields lower and helped the Dow Jones Industrial Average to new highs.
Yesterday, the Dow dropped more than 100 points in early trading but by the official close was just 28.57 points lower at 8,194.04.
The job creation figures were about 100,000 higher than analysts had expected. Most of the growth was in services, particularly health, engineering, management and computers.
Factory employment was flat in July following seven months of moderate growth, according to the department. But a report yesterday from the National Association of Purchasing Management (NAPM) said executives were reporting increased manufacturing activity in July.
According to the NAPM, strong orders and production in July pointed to higher manufacturing orders and industrial production growth in coming months.
In a separate report, the Commerce Department said strong demand for commercial aircraft and cars was the main factor behind a rebound in orders to factories in June. Orders rose 1.2 per cent to a seasonally adjusted $328 billion, following a revised 0.5 per cent decline in May orders.
The jobs market is still showing no sign of wage inflation. So far this year the average monthly rise in hourly rates (2.9 cents) is lower than in 1996 (3.8 cents).
Congress has departed for its August break on a high note with the tax and balanced budget plan passed by both houses and awaiting a presidential signature, inflation almost a distant memory, and unemployment verging on a 24year low.
