Could that be a cloud on the US horizon?

AS THE Dow Jones Industrial Average makes another assault on the magic 10,000 level, few in the marketplace are worrying much about the economy. The US continues to deliver a soothing blend of low inflation and strong growth, with few signs that anything is about to change soon.

But there are some indications that, further down the road, that might start to alter. The merest whisper of inflation and the publicly expressed concerns of the Federal Reserve Board about the economy, although both still at low levels, may be a portent of change over the next few months.

The latest economic indicators show little change from the rosy pattern of the last year. Consumer price inflation continues to tick along, with prices rising by a meagre 0.1 per cent in February. The producer price index fell by 0.4 per cent last month, the most in a year. The trade deficit figures reached a record high of $16.99bn in January, but with the dollar still resilient, the markets took little concern from the news. The trade deficit continues to be alarming, but as yet there is little practical impact.

The Dow has taken continued strength from the remarkable durability of the US recovery. Consumer expenditure is barrelling along at a rate of about 5 per cent in real terms, and there seems little to get in the way of a further rise in equities. This week presents no particularly important economic figures, and the Federal Reserve's Open Market Committee does not meet until the 30 March.

But, while there may be absolutely nothing on the horizon now to spook the markets, the fact that most stocks are lagging behind the large capitalisation issues indicates that the market is not in an entirely robust frame of mind. And there are some pressing reasons to consider that the pace of expansion may well get more difficult in the coming weeks, however many baseball hats the New York Stock Exchange throws out this week.

The first lies in the Fed, which has been quietly hinting for some time now that it was switching from a negative view of the economy towards seeing a rate rise as more likely than a cut.

The financial markets seem to be pricing in a rise in the Federal Funds rate from 4.75 per cent to 5 per cent by the summer. The Fed chairman, Alan Greenspan, indicated in his testimony to Congress earlier this year that one key point the Fed had to consider was whether its rate reductions last year had been precipitate. Although there is little sign so far of inflation breaking through, it would seem that he, at least, thinks they may have been: if there is a further crisis in international markets, - triggered by a default in Romania, for instance - it may be that the Fed would not, this time, come through.

Expectations of higher rates fit with the Fed's own apparently rising concern about the risk of wage rises, which came through as the strongest theme of its "Beige Book", the survey of local conditions at the regional Fed districts.

"Finding qualified workers has become more difficult in several districts, and reports of faster wage increases were more widespread than in recent months," said the report, released last week. "Employers in the Chicago, Minneapolis, Kansas City and Dallas districts continued to experience difficulty finding qualified workers."

Markets for retail labour remained tight across much of the nation, especially in the New York and Kansas City districts, where finding even entry-level workers was said to be difficult. There is a boom in temp agencies, and the report noted that in the Midwest and the South, "temporary help firms were unable to meet their clients' demand for workers, raising the probability of future wage increases".

The third factor leading some analysts to start watching prices again is oil. One of the key points sustaining America's eight-year expansion has been the low prices of commodities, and especially energy.

Although few oil analysts see the latest moves by key producers to revitalise production discipline as having a lasting effect or a fundamentally solid underpinning, the mere fact that the price of oil has started to rise after so long in the doldrums was already sparking some nerves on Wall Street last week. It was, after all, unlikely to stay at 25-year lows for ever. Prices have risen by 40 per cent to five-month highs, taking the price back up to 15 dollars a barrel.

None of these developments, by itself, is enough to put a big dent in the longest recovery in American history. But the boom has relied very strongly on a crucial interaction between labour markets and prices: even when there has been wage pressure, producers have been unwilling to allow that to feed into the prices for their goods. Most goods markets in the US are just too competitive at the moment for anyone to risk pricing themselves out.

The US and its policymakers have done much to sustain the boom, but they have had plenty of assistance from abroad. The environment has been one of low and falling prices of imported goods, fed by weak commodity markets.

If oil prices start to rise while pressure on employers to raise wages also steps up, it may be that the formula that has paid such dividends for the past eight years starts to lose some of its magic.