US jobs surge sparks fears of inflation

EMPLOYMENT in the United States soared by a far greater than expected 217,000 in February, deepening fears that the US Federal Reserve Board will soon be forced to push up short-term interest rates to forestall a fresh outbreak of inflation pressures.

The jump in non-farm payroll employment came despite severe winter weather. It was accompanied by a record 4.6 overtime hours per week in manufacturing industry. Both factors were taken as indications that the momentum of extremely strong fourth-quarter growth may have spilled over into the first three months of the year.

The US Labor Department estimated that as a result of job creation and a decline in registered unemployment the jobless rate dropped to 6.5 per cent, a fall of 0.2 per cent from the previous month.

However, it warned that problems with seasonal adjustment might have exaggerated the fall. In January the department changed its method of calculating the jobless rate but must still rely on the old method of assessing seasonal trends, before a new pattern is established over the next 12 months. The resulting uncertainty over how to assess the figures helped to dampen the markets' reaction.

Most of the gain in employment came from a 227,000 surge in job growth in services, while employment in construction dropped by 22,000 owing to the harsh winter weather. By contrast, manufacturing employment climbed by 12,000.

Worries over another rise in US rates, following the first increase in five years early last month, pushed US Treasury bond prices lower but European markets were unperturbed; gilt-edged prices rose a point, German bund prices improved and French and Spanish bonds gained half a point.

Reflecting relief that the Fed refrained from tightening policy yesterday, the FT-SE 100 Index of leading UK shares advanced to a closing 3,278.0, an increase of 31.5 points. US share prices also firmed.

Analysts were encouraged by the reaction of European bond markets to the US jobs report because it suggested that European rates could fall further even though expectations of higher US rates are widespread.

However, this was not a universal view and a number of analysts worried that bond markets were set for another rocky ride when the US central bank next raises rates.

Kenneth Clarke, the Chancellor, said the European economy could be near a turning point. He also maintained his forecast of 2.5 per cent growth this year, despite figures from the Bank of England showing that the rise in bank and building society lending in January was only half the level first estimated. The Bank said seasonally adjusted mortgage lending fell from pounds 1.64bn in December to pounds 1.56bn in January.

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