Strong US data disappoint investors

Federal Reserve chairman Alan Greenspan: difficult data to decipher

Key figures have eased fears that the US economy is heading for a recession just yet.

There are no signs that the slowdown is ending. But these numbers do not scream recession

Christopher Low, chief economist, First Tennessee Capital Markets

Sales at US stores proved stronger than expected in the important Christmas period, rising 0.1% in December, the US Commerce Department said, while producer prices - the cost of goods for factories - rose more than expected.

Although the figures show that economy is not as weak as many had expected, a slowdown is clearly in evidence.

The Federal Reserve last week cut rates by 0.5% over fears of the slowdown in the US economy.

'Negative news'

Many stock market analysts expected that even weaker figures would push the Fed into further rate cuts soon - which might have helped shares recover from their recent declines.

"It's going to be somewhat negative news for the market because so much expectation is built into aggressive rate cutting by the Fed," said Barry Hyman, chief investment strategist at Weatherly Securities.

Christopher Low, chief economist at First Tennessee Capital Markets, New York, said: "There are no signs that the slowdown is ending. But these numbers do not scream recession."

US stock markets closed marginally weaker on Friday, with the Dow Jones Industrial Average off 0.79% points and the tech-heavy Nasdaq ending half a percent lower points lower.

The price of US bonds also declined as rate cut hopes evaporated, while the dollar strengthened briefly against the euro on diminished recession fears.

At 2100 GMT, the euro stood at $ 0.9512, compared to a day's high of $0.958.

Price pressure

Disappointment over the retail sales figures was compounded by further data showing underlying wholesale prices rising more than expected.

The data suggests the economy is not as weak and inflation is not as under control as people thought

Robert Macintosh, chief economist, Eaton Vance Management

Producer prices rose 0.3% in December, compared to the 0.1% increase expected, the US Labor Department revealed on Friday.

The figures, by raising fears of inflationary pressures, may also discourage the Federal Reserve from implementing large rate cuts, Wall Street analysts said.

The Federal Reserve on 30 January opens its next monthly session to discuss interest rates.

"You had two negative surprise," Mr Hyman said. "Both [figures] were stronger than expected.

"That's going to make it tough for Fed to consider anything more than a 0.25% cut at the January 30-31 meetings."

Robert Macintosh, chief economist at Eaton Vance Management in Boston, said: "It's difficult to draw a broad conclusion on one day of numbers.

"But it suggests the economy is not as weak and inflation is not as under control as people thought."

Puzzling auto data

The overall strength of retail sales hid a mixed picture for the sector.

Trade at motor dealerships defied gloomy forecasts by rising 0.3% in December.

But elsewhere sales, which had been expected to show a 0.1% rise, were flat, with trade at general stores notably slow.

Analysts questioned the rise in new car sales at a time when automakers are ordering production cut backs to allow growing warehouse stocks to clear.

"It is hard to take this [retail sales] report seriously," said Ian Sheperdson, chief economist at High Frequency Economics in New York.

While dealership and automaker figures rarely move exactly in line "this is a very wide gap indeed", he said.

First Tenessee's Christopher Low said: "Frankly these numbers are unusual because of autos."

Mixed signals

December's producer price figures also puzzled analysts.

While the overall figure was at its weakest since August, the core rate, which excludes volatile energy and food sectors, rose at its fastest rate since May.

The figures made 2000 the strongest calendar year for wholesale prices for 10 years, with the rise over the 12 months coming in at 3.6%.