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Friday, July 30, 1999 Published at 20:31 GMT 21:31 UK

Business: The Economy

Fresh US inflation jitters

The Dow Jones has fallen nearly 3% in July

A raft of US economic figures on Friday prompted a renewed round of interest rate rise jitters on Wall Street.

London FTSE 100
UK share prices
Dow Jones
World markets
Foreign exchange
For a second day in succession there were signs that inflationary pressures are working their way in the US economy, just as other data suggests the first indications of growth slowing down.

America's benchmark index of leading shares, the Dow Jones, fell a further 136.1 points to 10,655, following Thursday's 181 point fall. It has now dropped 2.9% in July.

The first set of Friday figures were from the US Commerce Department, which reported that consumer spending rose 0.3% in June, down from 0.6% in May.

While this suggested that the engine of the economic good times may be slowing, inflationary pressures were indicated by incomes increasing at 0.7%, up from May's 0.3%.

This rise in personal income was the sharpest gain since a 0.9% rise in November 1998.

[ image: There are few signs that the good times are over]
There are few signs that the good times are over
For most of this year, consumption has grown faster than incomes as households spent money from past gains, such as rising stock and home prices, to fund their spending.

The Commerce Department said savings are still being withdrawn, with the June savings rate falling 1% as consumers withdrew savings at an annual rate of $63bn. It also revised the May savings rate to a record decline of 1.4%.

The wages rise was in line with the 1.1% rise in the Labour Department's Employment Cost Index, published on Thursday, which measures what employers pay for their workers' wages, salaries and benefits.

This was the largest since a 1.2% gain in the June quarter of 1991.

Household appliances

Economists interpreted that as a sign of an already tight labour market beginning to kindle inflationary pressures, a sentiment Friday's personal income report would seem to reinforce.

The Commerce Department also reported that Americans bought 3.1% more new homes in June despite higher prices and the recent interest rate rise. The average price of homes rose to a record level of $196,500 beating the previous record set in April of $190,500.

"This report suggests there is some life left in the market as people rush to grab low (interest rates) before they go up," said one US economist.

Strong home sales has been a driving force behind consumer spending as new home owners spend lavishly on appliances and other expensive items, even if it requires going into debt or cashing in savings.

Manufacturing recovery

The picture of an economy which may require a rise in interest rates to cool it down, was completed by the July Chicago Purchasing Management Index (NAPM).

The NAPM index rose to 60.5 in July from 60 in June. An index above 50 indicates an expansion.

The report adds weight to evidence that the manufacturing sector, a drag on the economy in recent years, has staged a turnaround lately.

Economists said combined data would keep the US central bank, the Federal Reserve on its toes as it considers another interest rate move.

On Thursday two sets of figures showing a stronger than expected rise in employment costs, and a fall in the rate of economic growth, had prompted the Dow's fall.

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