ECON--John Berry, The Post: "Economic Growth Picks Up Steam" + "Wages, Benefits Rise At a Reduced Pace"
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>>> Economic Growth Picks Up Steam
By John M. Berry
Washington Post Staff Writer
Saturday , July 29, 2000 ; A01
The U.S. economy grew at a vigorous 5.2 percent annual rate from April through June, surprising analysts who had widely predicted a significant slowdown because of moderating consumer spending.
Instead, growth accelerated in the second quarter from the first quarter's 4.8 percent annual rate as the pullback by shoppers was more than offset by exceptionally strong increases in business spending for new plants, equipment and inventories, the Commerce Department reported yesterday.
The report revived the prospect that Federal Reserve policymakers may decide to raise short-term interest rates at their next meeting, Aug. 22, to reduce the risk of inflation. Stocks dropped sharply on Wall Street, where traders had expected evidence of a slowdown to persuade the Fed to hold off. [Story, Page E1.]
The growth level lifted the U.S. gross domestic product, a measure of the value of all goods and services produced in the country, to nearly $10 trillion.
One remarkable aspect of the report was that the economy was able to churn out so many more goods and services in the second quarter while the total number of hours worked by employees was virtually unchanged. That means productivity, the amount of goods and services produced for each hour worked--and the ultimate source of gains in Americans' standard of living--probably rose at roughly a 5 percent annual rate, analysts said.
"You just have to be blown away by the implications for productivity," said economist James Glassman of Chase Securities Inc. in New York. The continuing surge in business investment points to "much more favorable growth for productivity and the economy down the road," he said.
Meanwhile inflation, as measured by various price indexes covering GDP and its components, slowed in the second quarter. For instance, prices paid by U.S. purchasers of goods and services, whether produced in this country or imported, rose at a 2.2 percent rate, down from a 3.8 percent rate in the first three months of the year. Both figures were swollen by rising world oil prices, and in the second quarter inflation rose at only a 1.8 percent rate if volatile food and energy prices are excluded.
Analysts had expected the numbers to show that the economy had cooled because a stream of recent economic data had indicated a second-quarter slowdown in consumer spending, which accounts for two-thirds of GDP and has provided much of the fuel for recent supercharged growth rates. By contrast, analysts had less information on business investment, the source of the recent growth.
Personal consumption outlays increased at just a 3 percent pace in the April-June period, well below the 7.6 percent rate in the first three months of the year, according to the Commerce report.
But the figures also showed a surge in business spending, particularly in the category of computers, software programs and other equipment, which shot up 21 percent in each of the first and second quarters.
"The most striking aspect of the GDP report was the yawning gap between consumer and business spending," said Bruce Steinberg, chief economist for Merrill Lynch & Co. in New York. "We expect consumer moderation to persist. Consumer confidence is strong, but anecdotal data for July suggest that consumer spending remains on a moderate path."
Even so, the second-quarter growth rate was higher than many analysts believe can be sustained without triggering inflation. That raises the possibility that Fed policymakers will increase their target for overnight interest rates at their next meeting to slow growth to what they regard as a noninflationary pace.
Fed Chairman Alan Greenspan and many of his colleagues are concerned that if continued rapid growth were to cause unemployment to fall much below its current 4 percent level, wage increases could accelerate and add to inflationary pressures. To slow growth, the Fed has raised consumer and business borrowing costs by raising its target for overnight rates by a cumulative 1.75 percentage points to 6.5 percent since June 1999.
Although higher interest rates have apparently dampened consumer spending, businesses continue to invest, particularly in information technology, because the return on investment is often higher than the cost of borrowing. Greenspan has cited this as a reason to expect continued strong gains in productivity.
Said Glassman: "You can't close the door on more rate increases with this kind of performance. But if they have to raise interest rates because the economy is outperforming expectations, that's great."
Many forecasters, including those at the Fed, have long been predicting that the nation's phenomenal growth will soon slow, but as Glassman put it, "I can't remember a quarter that surprised me on the downside."
The second-quarter GDP figure, coupled with upward revisions to previously reported figures for the past three years, also showed that the economy grew 6 percent in the 12 months ended in June, a pace unprecedented so late in a U.S. economic expansion. The current period of uninterrupted growth, the longest in American history, began in the spring of 1991 following a brief recession.
The department's revisions were based on new and more complete data from a variety of sources covering the period since the beginning of 1996. They lifted that average GDP growth rate over the three-year period from 4.4 percent to 4.6 percent. Rates for particular quarters were both raised and lowered, with the largest upward revision coming in the final three months of last year, which is now pegged at a super-fast 8.3 percent rate, instead of 7.3 percent. The first quarter of this year, however, was revised downward to 4.8 percent from 5.5 percent.
SUMMER SURPRISE
The U.S. gross domestic product grew at an unexpectedly fast clip in the second quarter.
Growth in GDP, annual rate, in percent*
1999:
1: 3.5
2: 2.5
3: 5.7
4: 8.3
2000:
1: 4.8
2: 5.2
*Includes revised figures
SOURCE: Commerce Department
© 2000 The Washington Post Company <<<
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>>> Wages, Benefits Rise At a Reduced Pace
By John M. Berry
Washington Post Staff Writer
Friday , July 28, 2000 ; E04
Americans' wages and benefits rose 1 percent in the April-June period, down from a 1.4 percent increase in the previous three months, the Labor Department reported yesterday.
Analysts said the latest increase in the employment cost index does not pose any new inflationary threat because most of the added cost for firms was offset by increases in labor productivity, the amount of goods and services produced for each hour worked.
The wages-and-salaries component of the ECI, which is widely regarded by economists and policymakers as the best available measure of changes in workers' compensation costs, rose 1 percent in the second quarter, slightly less than the 1.1 percent increase in the first three months of the year.
The cost of benefits rose 1.1 percent after a 2 percent jump in the first quarter, which was largely attributed to higher premiums on employer-provided health insurance.
"These data indicate that the cost of labor continues to increase," said Dana Saporta of Stone & McCarthy Research Associates, a financial markets research firm. "But given the recently slower pace of consumer spending, continued productivity gains, and Federal Reserve Chairman Alan Greenspan's apparent predilection to wait and see what develops on the demand front, today's ECI figure would probably not be sufficient" to spur Fed policymakers to raise short-term interest rates when they meet Aug. 22.
If retail sales figures for July show a rebound in consumer purchases, however, Greenspan and his colleagues might decide to raise their target for overnight interest rates by another quarter-point, Saporta and other analysts said. That target has been raised six times for a cumulative 1.75-percentage-point increase to 6.5 percent since June of last year.
Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, N.Y., said the central bank "is more concerned with [the pace of economic] growth in the short term."
"These data confirm there is no need to panic, but they do not mean an August rate hike is off the agenda," Shepherdson said. "We still think that strong retail sales and payroll data will force a hike."
According to the ECI report, compensation costs for workers in private industry increased 1.1 percent in the second quarter, down from 1.5 percent in the first. State and local government workers' compensation rose a more modest 0.8 percent, the same as in the first quarter. In both cases, however, the cost of benefits increased only about half as fast as in the previous quarter.
Retail trade workers' wages and salaries rose only 0.7 percent, down sharply from 1.7 percent in the first quarter. Similarly, construction wages were up 1.1 percent, compared with 1.8 percent in the earlier period.
In the first quarter, the largest increase in wages and salaries, 2.4 percent, went to workers in finance, insurance and real estate. That dropped off significantly last quarter to only a 0.5 percent increase; the increases were larger, however, for transportation and public utilities workers and in wholesale trade, both of which rose 1.3 percent.
For the 12 months ended in June, the ECI was up 4.4 percent, compared with 3.2 percent for the year ended in June 1999.
Mickey Levy, chief economist at Bank of America in New York, said the larger increase was the result of tight labor markets and a "catch-up" in inflation-adjusted wages after the acceleration in productivity growth in recent years. "The modest upward drift in wage compensation continues, but it is not inflationary," Levy said. "Real wages are catching up with large productivity gains. Unit labor costs are well under control."
Separately, the Commerce Department reported that new orders for durable goods, such as motor vehicles, machinery and aircraft, shot up a whopping 10 percent last month, primarily because of a surge in orders for civilian aircraft received by Boeing Co.
Even excluding aircraft and defense items, orders rose 1.2 percent, a stronger showing than most analysts had expected. The new aircraft orders, on the other hand, won't have much impact on factory production in the near term because the planes will be delivered over a period of several years.
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