Dow surges as jobs data boosts rate rise fears

The likelihood of a US interest rate rise was enhanced yesterday by figures showing that 315,000 non-farm jobs were created last month while the country's unemployment rate held steady at a 30-year low of 4.1 per cent. But despite the figures, US equity markets recovered strongly in late trading yesterday, with the Dow Jones Industrial Average hitting a new record high.

For many economists, the Labour Department figures, showing jobs growth outside the farm sector growing at the fastest pace in five months, confirmed the assumption that the Federal Reserve Board would act to curb growth when it meets on February 1st-2nd.

The question remains whether the Federal Funds rate - at 5.5 per cent - will be pushed up by 25 or 50 basis points. Investors shrugged off the payroll data and fears of interest rate rises and at the close the Dow Jones stood at 11,522.56, a rise of 2.39 per cent.

The jobs figures - in sectors ranging from finance to food service to engineering - are seasonally adjusted, but the December estimates have been bolstered by holiday shopping, said Mr Jim Paulsen, chief investment officer for Well Capital Management in California.

Retail trade employment rose by 65,000 last month - twice the average monthly gain for the first 11 months of 1999. Transport and public utilities added 32,000 jobs, also twice the average monthly gain through November. Much of this was due to deliveries from increased Internet shopping.

Mr Richard Medley, of Medley Global Advisers in New York City, said the Fed would raise rates because the number of available workers had slipped to a record low. But he put the odds of a half percentage point rise as "very small", because there were still few signs of uncontrolled inflation.

At 4 per cent last year, productivity is outpacing inflation. Over last year, average hourly earnings rose by only 3.7 per cent.

Mr Paulsen said wage increases had been slowing - from 4.1 per cent in 1997 to 3.8 per cent in 1998 to last year's 3.7 per cent. "I don't think the Fed needs to raise," he said. "There have been many periods like this in our history when both unemployment and inflation were low. The last three [interest rate] increases are still working their way through the economy."

In a written commentary, Mr Ed Yardeni and Ms Debbie Johnson of Deutsche Blanc Alex Brown agreed that inflation pressures were subdued. "Wage inflation remains relatively moderate given tightness of the labour market because price inflation is so low," they said. "Wage pressures depend not only on the jobless rate, but also on the actual and expected inflation rates." Mr Paulsen said the trends he saw did not explain "inflation hysteria . . . If we have such a hot economy, why is manufacturing declining?"

Manufacturing employment was virtually unchanged in December. But job losses averaged 36,000 per month in the first half of the year, 10,000 in the third quarter, and held steady in the fourth quarter.

The factory workweek was unchanged in December at 41.7 hours, while factory overtime edged up by 0.1 hour to 4.7 hours. Employment in construction also rose in December - by 16,000 jobs.

Over the year, the sector gained 212,000 workers. Twelve thousand jobs were created in finance, insurance and real estate, the average monthly gain in 1999.

Despite wage gains, many Americans still are working at more than one job to make ends meet. The number of people holding multiple jobs stood at 8 million in December, 6 per cent of the labour force.