US data raise questions on economic recovery

Orders of US durable goods fell unexpectedly in May for the second successive month, according to official figures released yesterday, which raised questions about the strength of the US industrial recovery ahead of next week's Federal Reserve meeting.

The 1.6 per cent decline in durable goods (defined as products intended to last for more than three years) meant that orders have fallen by 4.2 per cent over the past two months. Economists had forecast, almost unanimously, a rise of more than 1 per cent.

Despite the disappointment, most analysts said the figures probably represented just a "speed bump" in the fast-paced revival of industrial output. The Fed released healthy industrial production numbers for April and May that also suggest that a strong recovery in manufacturing activity is under way.

"If we saw three consecutive monthly declines, it would be harder to dismiss the figures," said Mr Marc Chandler, chief currency strategist at HSBC in New York. "It is worth remembering that this is a very volatile series."

The Fed is expected to raise the Fed funds rate by a quarter point, from 1 per cent, and the bond market has priced in a series of increases expected to raise the Fed funds rate to 2.25 per cent by the end of the year.

Inflation has risen more sharply than Federal Reserve policymakers expected, with the core consumer price index up by more than 5 per cent on an annualised basis in the year to date.

Mr Alan Greenspan, the Federal Reserve chairman, and other Fed policymakers have sounded a reassuring note on the immediate inflation outlook. But while saying that it is likely that the Fed will be able to raise interest rates at a measured pace, policymakers have stressed that the central bank will act quickly to prevent accelerating inflation if its benign inflation outlook is incorrect.

While the yield on the 10-year Treasury bond is up by almost a full percentage point since mid-March, there has been considerable bond market volatility in response to weaker - and stronger-than-expected - data, in part reflecting uncertainty about the inflation outlook.

"This sizeable drop in durable goods orders was possibly the one thing that could spark a rally in bond markets in this week leading up to the Fed's nearly inevitable rate increase," said Mr Geoffrey Somes, an analyst at consultancy Economy.com.

Orders for motor vehicles fell 4 per cent, adding to evidence that the industry has higher inventories than it would like. The fall in durable goods orders in May followed a 9.9 per cent surge in February and March. Orders are still 12.6 per cent higher than 12 months ago. - (Financial Times Service)