Labor data hold steady Fed watchers relieved

Reports ease pressure for higher interest rates

July 31, 1996|By BLOOMBERG BUSINESS NEWS

WASHINGTON -- Labor costs, a key inflation component, barely budged in the second quarter, the government reported yesterday, easing the pressure on the Federal Reserve to raise interest rates.

Wage, salary and benefit costs for U.S. businesses rose 0.8 percent in the second quarter, the same as in the previous quarter, Labor Department figures showed.

"Fears of wage acceleration remain just that," said Bruce Steinberg, an economist at Merrill Lynch & Co., in New York. "Compensation costs remain under control."

Other reports yesterday suggested that the economy may be slowing, a positive trend for inflation expectations:

Sales of new single-family homes fell 5.3 percent in June as higher mortgage rates hurt demand, the Commerce Department reported.

Retail sales weakened in the first three weeks of July compared with a month earlier, according to the Johnson Redbook Service. Compared with a year earlier, sales edged higher.

Consumer attitudes about the economy remain upbeat. The Conference Board said its index of consumer confidence unexpectedly advanced to 107.2 in July -- the highest level in more than six years.

In financial markets, bonds rallied as investors bet that the Fed will decide against raising rates this summer.

"Inflation is very much contained," said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Fla.

The benchmark 30-year Treasury bond surged five-eighths of a point, pushing down its yield more than 5 basis points to 7.04 percent. Stocks also rose, with the Dow Jones industrial average advancing 47.34 points to close at 5481.93.

The employment cost index (ECI) is considered the most important of yesterday's reports to the inflation-fighting Fed. Labor costs account for about two-thirds of consumer prices. Testifying before Congress last week, Fed Chairman Alan Greenspan said the ECI report will be a key factor in the board's interest-rate decision.

Though average hourly wages have been rising substantially recently, increases in benefit costs have been slowing. In 1995, for example, consumer health care costs rose by the smallest amount in 23 years as managed care providers and insurance companies imposed pricing discipline on doctors, hospitals and drug makers.

Economists at the White House and Labor Department say the slowdown in the growth of fringe benefit costs leaves room for wages to rise without triggering inflation.

"It's important from the inflation side that one focuses on the overall costs to firms -- compensation, not wages," White House economist Joseph Stiglitz said recently. "Compensation has been growing at a very moderate rate."

Greenspan also told Congress that Fed policy-makers will be looking for signs that the economy, which expanded at an annual rate of 4 percent to 5 percent in the second quarter, according to analysts, will begin to cool down in the current third quarter.

The government's first report on second-quarter activity will come tomorrow. The purchasing managers' index will be released the same day. The report on July job conditions comes Friday.

Yesterday's report on new home sales flashed one signal of a slowdown. Not only did sales of new single-family homes fall 5.3 percent in June, but activity in May was revised downward. Sales rose just 1.2 percent that month, rather than the 7.5 percent jump reported previously.

"The economy should slow down," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, a Chicago-based investment firm. "The second quarter was a catch-up for the weak winter growth."

Still, some analysts said the Fed could decide to raise the federal funds rate on overnight bank loans by a quarter-point at its Aug. 20 meeting as an insurance policy against too-strong growth.

If Friday's report on July employment shows continued strength, the Fed will raise rates, predicted Robert Dederick, economic consultant at the Northern Trust Co. in Chicago. The Fed "is getting a little bit more [economic growth] than it would like to see," he said.

The Conference Board report suggested that consumers are of a mind to continue their spending ways. "Consumers are clearly confident about current economic conditions and anticipate further economic growth in the months ahead," said Edgar Fiedler, a Conference Board vice president.

July's consumer confidence index reading of 107.2, which FTC follows a revised June reading of 100.1, was the highest since May 1990. About 5,000 households are surveyed on their attitudes toward business conditions, jobs and their paychecks. Consumer spending accounts for about two-thirds of economic activity.

Among points of concern for the economy, late payments on credit cards and home mortgages have been on the rise, and personal bankruptcy filings are expected to exceed 1 million this year, an annual record.

Pub Date: 7/31/96

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