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Friday, 1 June, 2001, 22:23 GMT 23:23 UK
Mixed picture of US economy
Auto worker
Manufacturing continues to contract for the 10th month
Fresh economic data from the US has painted a mixed picture for world's largest economy with unemployment dipping but the manufacturing sector continuing to shrink.

The outlook for manufacturing remains bleak as confidence dropped to 42.1% in May from 43.2% in April, according to a National Association of Purchasing Management (NAPM) survey.

The drop was greater than expected and shows that manufacturing activity has contracted for 10 consecutive months.

However, US unemployment showed the first improvement in eight months and defied expectations that it would hit a three-year high.

The US jobless rate dropped by 0.1% to 4.4% in May, according to fresh data from the Labour department on Friday.

April's rate of 4.5% was the highest in two-and-a-half years.

US stocks closed higher as investors digested the conflicting data.

After declining through most of the morning, the Dow Jones industrial average changed direction at midday and closed up 0.7% at 10,990.41.

The Nasdaq composite index finished up 1.8% at 2,149.44.

Closely watched

The unemployment and NAPM data is watched closely by economists for signs of how the US economy is faring in its slowdown.

The further decline in manufacturing could increase the chances of the US Federal Reserve making another interest rate cut at its next meeting on 26-27 June.

Paul Kasriel, chief economist at Northern Trust in Chicago, warned against reading too much into the unemployment rebound.

"The numbers are still weak. We had a decline in payrolls and manufacturing has yet to really see a bottom," he added.

He predicted that the Fed would cut interest rates - possibly by a quarter point rather than a half point - next time it meets.

However, Alex Beuzelin, an analyst at Ruesch International in Washington, responded positively to the data, describing the jobless figures as "good news on all fronts".

"This report is going to support the idea that the worst of the downturn is over. It further supports the market's guarded optimism that the economy is on the way back up," he added.

Unemployment trends

May's drop in the jobless rate has broken the trend of rising unemployment since September - when unemployment fell to a 30-year low of 3.9%.

The data on Friday also indicated that US payrolls shrank by 19,000 in May, after a revised 182,000 drop in April.

Previously, economists had estimated that US payrolls would shrink by 17,000-25,000 jobs in May.

The figure of 19,000 reflected a rebound in hiring in the service sector, where 70,000 new jobs were created last month.

But in line with the NAPM survey, the Labour department said that manufacturing lost 124,000 jobs in May.

Original figures had also indicated that the payrolls declined by a hefty 223,000 in April - which has now been revised downwards to 182,000.

Additionally, the new figures showed that instead of declining, payroll jobs rose by 59,000 in March.

Thwarted expectations

Prior to the latest set of NAPM data, analysts had expected the manufacturing index to show a slight increase in confidence to 43.5% from 43.2% in April.

For the ninth consecutive month, the NAPM figure has been below 50%, which indicates the sector continues to be in recession.

Economists are concerned that the weakness in manufacturing could spread to the rest of the economy.

"All of this indicates that the whole manufacturing sector is suffering," said Carol Stone, deputy chief economist at Nomura Securities in New York.

"If you're making fewer things, then you need fewer people to transport them, and fewer people to finance them, and fewer people to distribute them down the line. So it's important and it's key to the current state of the economy."

Consumers still spending

The US markets are already pricing in the probability that the Federal Reserve will cut interest rates by 25 basis points (0.25%) at its next meeting.

This is despite figures this week that showed US consumers were still confident, with spending outstripping earnings.

Consumer spending accounts for two thirds of US gross domestic product and has been identified by Federal Reserve chairman Alan Greenspan as the critical factor if the US economy is to avoid recession.

Last week, Mr Greenspan signalled there could be more rate cuts if the US economy remains sluggish.

After five 0.5% cuts this year, interest rates are now, at 4%, at their lowest level for seven years.

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