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3Q wage costs in line
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October 26, 2000: 8:49 a.m. ET
Employment Cost Index gains 0.9% in third quarter, matching forecasts
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Labor costs for U.S. companies rose in the third quarter at the smallest pace in a year -- an indication that the hot job market isn't forcing firms to shell out more to hire and keep workers.
 The Labor Department said Thursday that its Employment Cost Index for U.S. businesses rose at a 0.9 percent rate in the quarter, just below Wall Street forecasts for a 1 percent rise and the 1 percent gain posted in the second quarter. Benefit costs rose 1 percent while wages rose 0.8 percent, both in line with expectations.
While the numbers confirm that companies are dishing out slightly more to hire and retain 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.
"The data confirm that the labor market is still not generating the sort of cost pressures many analysts expected with 4 percent unemployment," said Ian Shepherdson, chief U.S. economist with High Frequency Economics.
The Labor Department also reported Thursday that its weekly tally of unemployment claims slipped to 305,000 for the week ended Oct. 21 from a revised 310,000 the week before.
'Remarkable' economic progress
Federal Reserve policy makers have been keeping a watchful eye on labor costs to see if they are forcing companies to lift the prices they charge for goods and services, fueling inflation. With the U.S. jobless rate at a near-30-year low of 3.9 percent, companies run the risk of having to pay more or offer bigger benefits packages to attract and retain workers.
 So far that doesn't appear to be the case. Speaking at a conference on financial regulation in Brussels Thursday, New York Fed President William McDonough remarked on the "remarkable economic performance" of the U.S. economy, which is "characterized by a very low level of unemployment and a virtually non-existent level of inflation."
Vincent Boberksi, senior economist with Dain Rauscher Wessels, told CNNfn's Before Hours that higher wages are not being demanded by workers -- something that is allowing companies to keep their costs in check and use the extra cash to invest in technology and hire more workers.
That, combined with other evidence of slowing economic activity, should keep inflation in check and convince Fed policy makers to leave short-term rates where they are through the remainder of this year, Boberksi said. It may even prompt them to begin lowering rates in the early part of 2001 -- something they would do to encourage growth, he said. (425KB WAV) (425KB AIFF)
Productivity gains key
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 helped them keep their wage costs down. Labor costs can account for as much as two-thirds of a typical company's overall expenses.
 Those productivity gains have compelled Federal Reserve Chairman Alan Greenspan and his colleagues on the interest rate-setting Federal Open Market Committee to publicly marvel are faster, better and cheaper ways for companies and people to conduct business with one another.
Online shopping for everything from books to boots, automated check-outs at grocery stores and gasoline stations, and paperless transactions involving e-mail and the Web have allowed companies to keep their costs in check, ensuring that prices for goods and services remains contained.
Technology has also allowed companies to produce everything from sweaters and sweatshirts to Sony Playstation 2 video game sets at lower costs and faster speeds than before. And analysts are optimistic that further enhancements in technology -- combining all the communications devices we now use into wireless devices that have high-speed Internet access to the Internet, for instance -- will boost productivity even more.
Inflation 'not a problem'
"The Fed might have been in a dilemma if signs of slower growth were coupled with signs of a wage/price spiral," said Sherry Cooper, chief economist with BMO Nesbitt Burns in Toronto. "However, that is emphatically not the case. The underlying inflation outlook is not a problem for the Fed or the financial markets."
 The Fed's policy arm, the Federal Open Market Committee, last raised rates in May by a half-point to 6.5 percent in an effort to slow the economy and keep inflation under wraps. They have since left rates unchanged though have cautioned financial markets that they are still leaning toward another rate rise -- particularly if inflation flares up.
But the economy is slowing down. The Commerce Department will release its initial tally of third-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 3.5 percent pace in the third quarter after advancing at a 5.6 percent pace in the second quarter and a 8.2 percent pace in the fourth.
Employers' labor costs rose 4.3 percent in the quarter from the 1999 third quarter -- just below the year-over-year gain of 4.4 percent in the second quarter. The seasonally adjusted index measures changes in wages, salaries and employer costs for employee benefits. 
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