=DJ Data Snap: 1Q U.S. ECI Shows Biggest Gain Since 3Q 1989
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Employment Cost Index !Surprise: Yes !
1Q 4Q !Trend: !
ECI 1.4% +1.0% ! Inflationary !
Benefit Costs 2.0% +1.2% !Consensus: !
Wages & Salaries 1.1% +0.9% ! ECI +0.9% !
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WASHINGTON (Dow Jones)--U.S. worker compensation costs rose at the fastest pace in nearly 11 years in the first quarter, fanning fears that the Federal Reserve may raise interest rates more aggressively than markets have been expecting.
The Labor Department said Thursday the Employment Cost Index rose a larger-than-expected 1.4% in the first three months of 2000, an acceleration from the fourth quarter's 1.0% increase. Year-over-year, the ECI grew at a 4.3% rate, the quickest pace since the fourth quarter of 1991.
With financial markets on alert for any trace of inflation, the figures can be expected to rattle Wall Street, where economists called for the ECI to jump 0.9% from January through March. Now, armed with strong evidence of an uptick in inflationary pressures, markets should push stock and bond prices down.
Because employers, already faced with the tightest labor market in three decades, are being forced to spend more money attracting and retaining workers, economists worry they will raise prices. Those fears may be justified: 54% of companies polled last month by the National Association for Business Economics said they had raised wages and salaries, while 29% said they have decided to raise product prices.
The specter of inflation has officials from the Fed talking tough. "If inflation gets away from the Fed to any significant degree in the years ahead - and I am pushing with every bone in my body to do what I can to make sure that circumstance does not face us - then the dangers of recession will surely rise," William Poole, President of the St. Louis Fed, said Tuesday.
"We need to be preemptive," agreed Richmond Fed President Al Broaddus, who, unlike Poole, has a vote on the policy-setting Federal Open Market Committee.
Despite such warnings, however, financial markets so far have maintained relatively benign expectations of interest-rate increases. Futures contracts on the key federal funds rates show investors expect the rate to rise half a percentage point to 6.5% by September, including a quarter-point increase next month.
But many economists have been warning that the markets have underestimated the degree of aggressiveness the Fed is likely to show. One prominent forecaster, Macroeconomic Advisers, has predicted the Fed will raise the funds rate to 7% by October. The surge in employment costs in the first quarter is likely to cause financial markets to price in such rate increases.
The Labor Department said the first quarter ECI increase featured the biggest rise in benefit costs in a decade.
Over the past five years, subdued first quarter benefit cost increases have helped contain compensation costs in recent years. But this year, such costs, which represent nearly a third of the entire index, rose 2.0% in the first quarter, reflecting the higher price of health insurance and rising bonuses in the financial sector. In the private sector, benefit costs rose 2.3% in the first quarter, accelerating from a 1.1% gain in the fourth quarter.
The other 70% of the ECI, wages and salaries, also gained speed in the first quarter, rising 1.1% after a 0.9% boost in the final period of 1999. Wages and salaries for private-industry workers rose at a faster rate than for state and local government workers - gaining 1.2% compared with 0.9% for government employees.
Wages and salaries in the finance, insurance and real estate sector surged 2.4% in the first quarter, rising almost five times faster than in the fourth quarter. Construction wages and salaries advanced 1.8%, following a 0.9% rise in the fourth quarter. In retail trade, wages and salaries rose 1.7% in the first quarter, after a 0.9% increase in the previous period.
-Henry J. Pulizzi and Joseph Rebello; Dow Jones Newswires; 202-862-9255;
(END) DOW JONES NEWS 04-27-00
08:30 AM |
