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US Prospects Worsen, Economic Data Weaken

Bad news on the US economy - and its prospects - was easy to find on Thursday.

Official reports showed the number of US citizens on the dole has hit an 18-year high. Manufacturing sentiment has dropped to its lowest level since the 1990-91 recession. Meanwhile, a separate report on Thursday showed personal spending slipped at its fastest pace in 14 years in September, as US consumers reeled from terrorist attacks, and mounting unemployment.

Even so, investors appeared to look past the figures to focus on the possibility of an eventual recovery.

The US commerce department said consumer spending - accounting for roughly two-thirds of the US economy - fell a seasonally adjusted 1.8 per cent in September after a 0.2 per cent increase in August. The drop was the sharpest since January 1987. For the second straight month income hardly grew, and the savings rate - the amount of after-tax income left unspent - rose to 4.5 per cent, the highest in nearly three years.

The figures had already been factored into the department's GDP report on Wednesday, which showed the US economy shrank for the first time in eight years in the third quarter. That report also showed the sharpest drop in US exports and imports in nearly two decades, underscoring twin threats - the stumbling US economy's impact on the global economy, and the impact of global economic weakness on a US recovery.

Separately, the US labour department said first-time claims for unemployment insurance fell last week, but the number of Americans requesting unemployment insurance benefits on an ongoing basis - reflecting both job cuts and the evaporation of job openings - rose to 3.7m, the highest since May 1983.

The National Association of Purchasing Management said its index of factory activity, based on a survey of manufacturing sentiment, fell to a nine-year low of 39.8 in October, the lowest level since the end of the 1990-91 recession. More disturbing, a forward-looking component of the index measuring new orders fell to its second-lowest level this decade, suggesting no immediate let-up in the year-long slide of factory production.

Meanwhile, equity prices soared in part on the belief that more dramatic measures will be taken to resuscitate growth.

As of early Thursday afternoon, the Dow Jones Industrial Average was up 2 per cent at 9,261.61, the Nasdaq Composite was 2.7 higher per cent at 1,735.58 and the S&P 500 was up 2 per cent at 1,080.62. The Nasdaq and S&P 500 were both well above pre-September 11 attack levels.

The Federal Reserve's policy-making open market committee (FOMC) meets next week to discuss what more, if anything, it should do to arrest this slide. It has already reduced its target for the Fed funds rate 4 percentage points to a nine-year low this year.

But questions about the effectiveness of its anti-recession campaign persist.

With few obvious signs of inflation, futures prices have registered hopes for a half-point reduction in the fed funds rate to 2 per cent by February, which would be the lowest in more than three decades.

President Bush on Wednesday called on congressional lawmakers to get a fiscal stimulus bill "to my desk before the end of November" amid concerns in some quarters that the stimulus package now in development in Congress has mutated into a political boondoggle with few economic merits.