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U.S. labor costs rise
July 26, 2001: 10:14 a.m. ET

Employment cost index up less than expected; durable goods orders fall
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NEW YORK (CNNfn) - Labor costs in the United States rose in the second quarter, the government said Thursday, though the gain was smaller than analysts expected, indicating inflation in the world's biggest economy remains in check.

  We're not going to see much pressure on wage costs in the foreseeable future.  
  David Resler
Nomura Securities
The Labor Department said its Employment Cost Index, which measures workers' wages and salaries and is closely watched for signs of inflation, rose 0.9 percent in the second quarter after rising 1.1 percent in the first quarter. Analysts polled by expected a 1.0-percent rise.

For the 12 months ended this June, the employment cost index rose 3.9 percent, substantially less than the 4.4 percent gain seen for the comparable 12-month period a year earlier.

During the latest quarter, wages and salaries rose 1.0 percent, the same as in the previous quarter. But benefit costs gained 1.0 percent, which was down from the 1.3 percent rise seen in the first quarter.

"The smaller-than-expected increase in benefits is a sign of things to come," said David Resler, chief economist with Nomura Securities International. "We're not going to see much pressure on wage costs in the foreseeable future."

Separately, the Commerce Department said U.S. orders for durable goods -- expensive items such as computers and cars -- fell 2.0 percent after rising a revised 2.7 percent in May. Wall Street economists surveyed by had forecast a 1.0-percent decrease. Excluding volatile transportation-sector orders, durables orders fell 1.5 percent in June.

U.S. stocks showed little reaction to the data, falling as corporate profit woes continued. U.S. Treasury bond prices rose slightly on the surprising weakness in durable goods orders, which raised hopes for another interest-rate cut by the Federal Reserve.

Inflation in check

Federal Reserve policy-makers keep a watchful eye on labor costs to see if they are forcing companies to lift the prices they charge for goods and services, which could lead to higher inflation.

The Fed has cut its target for short-term interest rates six times this year in an effort to bolster the economy, and has consistently maintained that inflation seems to be in check.

Thursday's ECI number seems to confirm that view, and it's a number Fed Chairman Alan Greenspan watches closely, Anthony Crescenzi, bond market strategist at Miller Tabak & Co., told CNNfn's Before Hours program. (450K WAV) or (450K AIF)

The downside of the ECI number, however, is that lower wages and benefits for workers could mean they'll spend less. Consumer spending makes up two-thirds of U.S. economic activity, and the Fed has made its rate cuts mostly to boost that.

Still, most analysts think the Fed is unlikely to cut by more than a quarter percentage point at its next meeting, scheduled for Aug. 21. So far this year, it has slashed rates from 6.5 percent to 3.75 percent, its most aggressive cuts since the last recession.

Click here for's economic calendar

In a separate report Thursday, the Labor Department said the number of initial jobless claims for state unemployment benefits fell by 51,000 to 366,000 in the week ended July 21 from a revised 417,000 claims reported the week earlier.

"There are hints now that the worst may be over in the labor story," Crescenzi said.

Manufacturing: the bleeding continues

Still, durable goods orders fell rather drastically in June, a blow to hopes the manufacturing sector may be climbing its way out of a deep slump. Those hopes were strengthened in May, when the government reported across-the-board increases in durable goods orders -- gains that were nearly erased in June.

Compared with June 2000, durable goods orders were down a whopping 22 percent.

"These data suggest that the manufacturing sector continues to bleed," said Steven Wood, economist with FinancialOxygen. "Lower interest rates, fiscal stimulus and declining energy costs have not yet made any difference to this part of the economy."

Still, analysts usually caution against reading too much into the durable goods report, which is notorious for seesawing month-to-month since a large change in just one sector, such as aircraft, can distort the overall number.

Orders for cars and car parts plunged 5.0 percent in June after posting a 6.8 percent increase in May, the department said. Computers and electronic product orders fell 3.2 percent last month following a 0.6 percent gain in May.

Encouragingly, inventories of durable goods fell for the fifth straight month in June, meaning companies are getting rid of their backlog of unsold goods. When inventories are at an acceptable level, companies can increase production, creating new jobs.

The most important U.S. economic news of the week is scheduled to be released Friday, when the government gives its first estimate of second-quarter gross domestic product, the broadest measure of U.S. economic strength. graphic

- from staff and wire reports


U.S. jobless claims drop - July 26, 2001

Greenspan says risks continue - July 24, 2001

Fed cuts interest rates a quarter point - June 27, 2001

U.S. consumer confidence, durable goods orders strong - June 26, 2001

U.S. labor costs rise - April 26, 2001


Employment Cost Index report

Durable goods report

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