These reflected low domestic inflation and high levels of employment, despite the threat from a sweeping worldwide recession.

Consumer prices rose just 0.1% in December giving a modest annual inflation rate of 1.6% for 1998.

The US Labor Department said this was the lowest calendar-year inflation result, and the smallest monthly rise, for 12 years. Unemployment is already at a 29 year low.

Sales holding up

Consumer spending held up with retail sales rising 0.9% from November to $231.35bn. During 1998, sales recorded a solid 5.1% gain.

However, the high number of cars leaving the forecourts masked a fall in sales at clothing and department stores, the first decline since July, according to the Commerce Department.

The signs of a slow Christmas in some retail sectors together with rising unemployment benefit claims at the end of December, will increase concerns about an expected economic slowdown in 1999.

Job blip

Applications surged 83,000 during the week before Christmas, the biggest increase in six years, but fell back in the following two weeks, the Labor Department said.

However, analysts say overall the figures remain healthy. Excluding new car sales, retail sales were up 0.4% while overall retail sales were 6.7% up on December 1997.

Charles Reingard, strategist at ABN Amro said: "It shows that 1999 is starting with momentum in the retail sales area. There's a good consumer backdrop for sales. We have a low unemployment rate and labour costs are rising above the overall pace of inflation."

Paine Webber economist Jerry Zukowski added: "How long this will sustain, we don't know. We've been looking for the demise of consumer spending for over a year."

Consumer spending accounts for two-thirds of US economic activity and was the main factor behind healthy 1998 performance.

A plunge in export sales to troubled economies in Asia led to more than 200,000 jobs going in manufacturing.

Yet the nation's unemployment rate was 4.5%, the lowest in 29 years showing that more jobs were being created than lost.