Output boost calms US fears

The odds on the US Federal Reserve raising interest rates next week lengthened yesterday after official figures showing a sharp rise in productivity and flat retail sales calmed fears that the American economy is overheating.

Defying Wall Street's forecast of a weaker gain, output per hour of workers outside the farm sector rose at an annual rate of 4.2% between July and September, said the Labour Department.

This was the fastest productivity rate rise since a 4.4% increase in the first quarter of last year and suggested that firms are able to boost output without incurring higher labour costs.

In a separate report, the Commerce Department said retail sales in October were flat. Financial markets were buoyed by the reports, with the Dow Jones and the dollar both moving higher in early trading in New York.

Analysts said the data could make it harder for the Federal Reserve to raise rates at its meeting on Tuesday.

With productivity high, unit labour costs were kept in check, gaining just 0.6% during the quarter, the lowest rate since a 0.5% increase in the fourth quarter of 1998.

"It's a difficult call for the Fed," said John Shepperd, economist at Dresdner Kleinwort Benson in London. "How can they raise rates when unit wage costs are only increasing up 0.6 [percent] and inflation is close to 2%?"

US productivity gains have been strong in recent years, largely fired by exploitation of computer technology, leading some commentators to herald a new era of rapid growth without inflation. The weakness of retail sales was due to a second consecutive monthly fall in car and truck sales.

Excluding cars and trucks, however, business was brisk, with sales growing 0.5% compared to September. Demand for clothing and building materials was particularly strong.

Scott Brown, an economist at Raymond James & Associates in St Petersburg, Florida, said: "Excluding autos it does suggest that people are still out there spending."

While analysts remain divided about the outcome of next week's Fed meeting, a small majority appears to favour no change, pointing to data such as yesterday's as evidence that the economy is starting to slow to a more sustainable rate.