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2Q labor costs ease
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July 27, 2000: 8:45 a.m. ET
2Q employment cost index rises 1%, in line with forecasts; durables surge
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Payroll, benefit and bonus costs for U.S. companies rose less in the second quarter than in the first three months of the year -- an indication that the hot U.S. labor market isn't forcing firms to shell out more to hire and keep workers, a government report released Thursday showed.
A separate report showing that orders for durable goods posted their largest jump in almost nine years raised some concern on Wall Street that demand for big-ticket items may not be slowing as much previously thought.
 The Labor Department said that labor costs for U.S. businesses rose at a rate of 1 percent in the quarter, matching economists' predictions and slightly less the 1.4 percent increase recorded in the first quarter. Benefit costs rose 1.1 percent while overall wages, which include both fixed salaries and hourly rates, gained 1 percent.
While the numbers confirm that companies are dishing out more to hire and retain a shrinking pool of workers, they also indicate that firms are keeping those workers productive, squeezing the most out of them in order to keep their overall costs down and the prices for their goods and services, stable.
"What it suggests is that the economy is doing exactly what it's supposed to be doing: moderating to more comfortable levels," Mickey Levy, chief economist with Banc of America, told CNNfn's Before Hours. "Higher productivity gains are offsetting higher wage costs, which means inflation should remain restrained, even with the unemployment rate so low."
Laptops, cell phones, beepers, Palm Pilots...
What had kept companies from raising prices significantly so far have been strong gains in worker productivity, in which advances in technology -- everything from smaller and faster computer chips to wireless phones -- have kept their wage costs down. Labor costs typically account for more than two-thirds of a typical company's overall expenses.
 Fed policy-makers and investors have been watching labor costs to see if they are forcing companies to lift the prices they charge for goods and services, fueling inflation. On top of that, with the U.S. jobless rate at a near-30-year low of 4 percent, companies run the risk of having to pay more or offer bigger benefits packages to attract and retain workers, which could also lead to higher wage and benefit costs.
All the same, Fed Chairman Alan Greenspan told Congress last week that inflation could be restrained even with unemployment near current levels. That's because businesses are striving to make gains in productivity. U.S. worker productivity grew 3.7 percent in the first quarter compared with the same period last year, almost matching the rise in employment costs.
Greenspan "seems to be suggesting that changes in productivity growth are structural, not cyclical," said Oscar Gonzales, an economist with John Hancock Financial Services in Boston. "We may simply be seeing the rewards of that growth, which is the way it's supposed to work."
Slowing growth, stable wage costs
Employers' labor costs jumped 4.4 percent from a year earlier, the largest increase since a 4.6 percent year-to-year gain in the second quarter of 1991. The seasonally adjusted employment cost index measures companies' wage, benefit and salary costs over a three-month period.
 "Although the numbers are in line with expectations, the gains will be especially worrisome to Fed board members who see tight labor markets as generating compensation gains that potentially boost inflation," said Rick MacDonald, an analyst with Standard & Poor's MMS in San Francisco. Those at the Fed who see it that way could argue for a quarter-point insurance rate hike at the Aug. 22nd meeting, he said.
All the same, Levy told CNNfn that productivity gains, combined with more moderate second-quarter growth in the neighborhood of 3.5 percent to 4 percent, should be enough to convince the rest of the Federal Open Market Committee, including Greenspan, to hold off raising rates. (550KB WAV) (550KB AIFF)
The Commerce Department will release its initial tally of second-quarter gross domestic product Friday at 8:30 a.m. ET. Analysts polled by Briefing.com expect that the U.S. economy slowed to a 3.7 percent pace in the second quarter after advancing at a 5.5 percent pace in the first quarter and a 7.3 percent pace in the fourth.
Will that be 100 airplanes, or 200?
Soaring demand for commercial aircraft helped drive orders for costly manufactured goods up by the highest rate in nine years in June, the Commerce Department unveiled in a separate report released Thursday.
The value of orders for durable goods -- items such as airplanes and refrigerators intended to last three years or more -- surged 10 percent in June after an upwardly revised jump of 7 percent in May. It was the biggest monthly orders gain since a 13.9 percent increase in July 1991 and much stronger than economists' forecasts of a 0.4 percent drop.
 Every category of manufactured goods recorded order increases in June, with the largest gain seen in transportation goods which jumped a record 43 percent to $69.1 billion after a 6.8 percent rise in May. The department said most of the transportation orders increase was for new aircraft and parts.
The monthly report on durable goods is highly volatile, since orders for items like airplanes often come in batches and are for big dollar amounts. Still, the June increase was so large that it was likely to raise questions whether a hoped-for slowdown in the economy was occurring fast enough to ward off more interest-rate increases by the Fed.
"If this kind of strength follows through to other reports, it will become very difficult for the Fed to leave rates unchanged when they meet on Aug. 22nd," said Mark Vitner, an economist with First Union National Bank. Still, the report is extremely volatile and we do not expect that to happen." 
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