US rates set to rise as job numbers grow

Another 284,000 jobs were created by the US economy in May as signs that the country's "jobless recovery" was over grew, Labour Department statistics showed today.

The number of new non-agricultural jobs exceeded Wall Street expectations of 200,000, strengthening expectations that the Federal Reserve would start raising interest rates from their current 46-year low of 1%.

Further evidence that strong economic growth was finally feeding into the job market was provided when jobs growth in April and March was revised upwards by a total of 74,000.

Over the past three months, the US economy created 947,00 jobs, the best three-month gain since the summer of 2000. The unemployment rate remained at 5.6%.

Today's news will come as welcome relief to George Bush's administration, which has been buffeted by events in Iraq and taking political heat over high petrol pump prices.

So far in 2004, the US economy has created 1.2m jobs - an average of 238,000 jobs a month - after shedding 2.7m between March 2001 and August 2003.

The US economy has only recently begun to create jobs, despite strong GDP growth since last year, and Mr Bush faced criticism that he was presiding over a jobless recovery.

Many economists now expect the economy to generate around 200,000 jobs a month for the remainder of this year - a pace that would meet the White House's once-derided forecast of a 2.6 million increase in job numbers this year.

With the jobless recovery coming to an end, analysts believe a rise in interest rates is all but inevitable, possibly happening as early as this month. The Fed's key interest rate has stood at a 1% for almost a year, while the US central bank waited for recovery to take hold.

Alan Greenspan, the Fed's chairman, has said the central bank intends to make the transition gradually, so long as inflation remains low.

"The current highly accommodative stance of monetary policy must be returned to a more neutral setting at some point," he said in a May 14 letter to Paul Sarbanes, a Democratic senator from Maryland.

However, he added: "The current backdrop of low inflation and under-utilised resources suggests that the transition ... can be undertaken at a pace that is likely to be measured."

In its report, the Labour Department revised its estimates of job growth for March and April, saying employers had added 353,000 jobs in March and 346,000 in April.

Initial estimates had shown a 337,000 increase in March and a 288,000 increase in April.

"In the past three months, US non-farm payrolls have risen by 947,000 - a sharp increase by any standards ... the data does serve as a counterweight to the generally less bullish data released in the past month," Doug McWilliams, an economist with the Centre for Economics and Business Research, said.

"This data probably makes a rate rise on June 30 slightly more likely, but it remains a close run thing."