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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: Justa Werkenstiff who wrote (13514)	4/27/2000 1:35:00 PM
From: MrGreenJeans	Read Replies (3) \| Respond to of 15132

Washington Post (MGJ's comments: Berry has good sources at the Fed. Good analysis from where I sit) By John M. Berry Washington Post Staff Writer Thursday, April 27, 2000; Page E01 Booming U.S. economic growth has scarcely slowed this year while American workers' pay and benefits are rising strongly, according to analysts' forecasts of government figures to be released today. But neither development is likely to prompt the Federal Reserve to move more aggressively to brake U.S. economic growth, because there is little evidence of a takeoff in inflation, and most economists, including many Fed officials, expect to see some slowing later this year. The Commerce Department is expected to report today that the economy grew at more than a 6 percent annual rate--perhaps even as much as a 7 percent rate--in the first three months of the year. If those analysts' forecasts prove correct, growth slowed only slightly from the sizzling 7.3 percent pace of the fourth quarter of 1999. Meanwhile, the Labor Department will release its March employment cost index, which is expected to show that workers' pay and benefits have risen faster than consumer prices over the past 12 months. Many analysts expect the ECI, the nation's most comprehensive measure of changes in employers' labor costs, to show that workers' compensation rose 3.9 percent over that period, the largest such change in eight years and slightly more than the 3.7 percent rise in consumer prices. Such strong numbers for the gross domestic product and the ECI should erase any doubt that Fed officials will decide at their next policymaking meeting, May 16, to raise their target for overnight interest rates for what would be the sixth time since June. "People are debating whether we're going to have a soft landing or a hard landing," Alfred Broaddus, president of the Federal Reserve Bank of Richmond, said in a speech earlier this week. "It doesn't look like we're having any kind of landing. It seems like we're accelerating to an even higher altitude." Nevertheless, most Fed watchers do not expect these numbers to cause the Fed to raise rates by more than a quarter of a percentage point. Since June there have been five such steps intended to keep inflation under control by slowing growth to what the Fed regards as a more sustainable pace--perhaps a 3.5 percent to 4 percent rate. The Fed can afford to take such a gradualist approach in part because of continued strong acceleration in the growth of worker productivity--the amount of goods and services produced for each hour worked. That has helped keep inflation low despite the lowest unemployment rates in more than three decades. As workers' efficiency improves, employers can afford to pay them more without having labor costs per unit of production go up. That means there is no additional pressure on the firm to raise its prices. These unit labor costs actually fell in the second half of last year in much of the economy, and forecasters predict that at worst they rose very slightly in the first quarter. A number of economists said there likely was a further decline in such costs in the first quarter, which is one reason corporate profits remain so high. The Labor Department will report productivity figures for the quarter on May 4. So even a sharp ECI increase doesn't mean the nation's tight labor markets are putting more pressure on inflation, and that, in turn, has kept the Fed from raising interest rates more aggressively. On April 14 the Labor Department reported that rising prices for energy, lodging away from home and some other items caused the consumer price index to jump 0.7 percent last month. Even the "core" portion of the index, which excludes volatile food and energy items, increased 0.4 percent. Fed officials clearly found those figures worrisome, but some of them agreed with analysts who regarded the March increases as an aberration. In particular, energy prices are likely to fall now that world oil prices have declined substantially since the beginning of March. Many economists believe that the Fed's strategy is working but that it takes many months for higher short-term interest rates to begin to slow the economy. Over time, higher borrowing costs for consumers and businesses will slow their spending, which has been the driving force behind the booming growth rates. Analysts who expect a slowdown also point to the recent behavior of the stock market, where all of the major price indexes are now lower than they were at the beginning of the year. That means there has been a partial--and so far fairly small--reversal of the wealth-generating process that has made U.S. households more willing to spend money in recent years. The markets may also hold back business investment in new plants and equipment because many firms may find it more difficult to raise funds through new stock issues. Further, the stock market's gyrations could also depress sky-high consumer confidence, which could dampen increases in consumer spending, which accounts for fully two-thirds of GDP. "The key question," said economist Rudi Dornbusch of the Massachusetts Institute of Technology, "is whether U.S. adjustment [to slower growth] occurs primarily via stock market adjustment and the impact of reduced wealth on spending, or else at the hands of the Fed. So far at least, the adjustment is doing very well--no crisis, no collapse but already a good down payment toward slowdown." That the long-running U.S. economic expansion has so far generated such a small amount of inflation is extraordinary, in the view of both analysts and Fed policymakers. In past booms, inflation has taken off and the Fed has had to stomp on the monetary brakes to slow it down, often plunging the economy into a recession. "It is extraordinary that, after four years of booming growth, the lowest unemployment in more than three decades and a doubling of petroleum prices, there is a debate about whether core inflation will be 2 percent or 2.5 percent," said economist James Glassman of Chase Securities Inc. in New York.