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ECI, GDP reports are key
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October 27, 1999: 3:33 p.m. ET
Markets anxiously await two major indicators of economy's direction
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - They are expected to confirm the two most predominant conditions of the U.S. economy in the 1990s -- strong growth and little inflation. Yet Wall Street is waiting on tenterhooks for Thursday's employment cost index and gross domestic product reports.
That's because, after almost nine years of uninterrupted expansion, hand-over-fist stock gains and near-negligible inflation, the U.S. economy appears to be on the cusp of -- something. And investors, analysts, economists -- everybody -- wants some kind of clear-cut indication of exactly what direction the U.S. economy is going.
"These numbers are going to be a harbinger of things to come," said Stephen Slifer, chief economist with Lehman Brothers in New York. "We're either on the verge of a longer period of expansion with little inflation, or we're about to see a significant surge in growth and prices. These numbers will really show us where we're at."
Here they come
On Thursday, the Labor Department will release its quarterly tally of companies' employment costs: how much they spend on wages, salaries, benefits, bonuses and retirement packages for their employees. Federal Reserve policy makers, particularly Fed Chairman Alan Greenspan, pay special attention to the report, which provides an indication of inflation at the wage level.
Also Thursday, the Commerce Department will release its first estimate of third-quarter economic growth, which will include for the first time several changes in how it's calculated. Analysts polled by Reuters are forecasting the report will show the economy expanded at a 4.7-percent annual pace between July and September, well above the 1.6 percent second-quarter pace.
The GDP deflator - one of the government's broadest measures of inflation - probably gained 1.2 percent during the quarter.
On the surface, the two reports don't sound like much; their names are mundane enough to choke off any light lunch or dinner conversation. But they provide two of the best gauges analysts and investors have for determining the pace of the U.S. economy and inflation.
"The numbers are very significant for the markets," said Al Goldman, chief market strategist with A.G. Edwards in St. Louis. The economy has slowed down to a much healthier sustainable rate of expansion. The question is whether that continues and whether prices remain in check."
Watching those wages
Wall Street and the Fed are concerned over whether employment gains, rising wages and robust demand abroad for U.S. goods and services are prodding wholesalers and retailers -- who make and sell the goods -- into lifting their prices, generating faster inflation.
So far, there's been little evidence that that's happening. Although September prices at the wholesale level surged 1.1 percent, the biggest monthly jump in 10 years, those costs didn't make it to the sticker prices on consumer goods.
But if the economy continues to show signs of strong growth and inflation begins to look more threatening, the Fed will be more inclined to raise rates, discouraging people and businesses from spending money and slowing the economy down, said Sherry Cooper, chief economist with brokerage Nesbitt Burns Inc. in Toronto.
"Recall the Fed's assessment following the (Federal Open Market Committee) meeting on Aug. 24, that the dual summertime rate hikes 'should markedly diminish the risk of inflation going forward,'" Cooper said. "This call is looking more tenuous with every passing day."
Looking more tenuous
The Fed raised rates twice this past summer, each time by a quarter percentage point, bringing its trend-setting Fed funds target rate up to 5.25 percent. At its Oct. 5 meeting, it chose not to raise rates, but said it was leaning toward doing so.
Fed officials repeatedly have warned about rising wage and benefit costs, since businesses' labor costs account for two thirds of inflation. Greenspan, in particular, has voiced concerns about the tight labor market and the lack of available workers required for an ever-growing number of positions.
The more employers need workers, the higher the wages they have to pay to entice them, which can lead to inflation, according to the theory.
That's why the ECI is said to be one of Greenspan's favorite indicators. Because consumer spending accounts for more than two-thirds of U.S. output, Greenspan wants to be sure that wages aren't rising too quickly, prompting more people to spend their earnings and driving prices higher.
To be sure, the quarterly GDP report will attract just as much attention, especially with the Commerce Department's recently announced revisions, which are expected to push the overall percentage rate of growth upward by as much as 1.5 percent.
"New Era" GDP
To keep up with the "new" economy, Commerce has decided to revamp how it calculates GDP, a move that will restate output by as much as 1.5 percent.
The new and improved GDP report will have several changes, including a new way to measure output in the financial services sector and the addition of software programs as part of businesses' and governments' total output.
Traditionally, business and government purchases of raw materials haven't been counted as part of the overall GDP number to avoid double- or triple-counting the output of some industries. The wheat grown by the farmer and the flour produced by the miller, for example, aren't counted in GDP, while bread -- the final product sold -- is.
While software is a long way away from wheat and flour and isn't part of the production process, it is now integral to most businesses' assembly lines. On that basis, it should be counted in the measurement of GDP, according to the Commerce Department.
That inevitably will boost the U.S. growth rate, since software expenses account for a good portion of most business spending. At the same time, productivity will gain as the number of hours worked stays the same while the amount of output gains.
"With these revisions to GDP, the evidence in favor of the New Era view of the U.S. economy becomes even stronger," said Wayne Angell, chief economist of Bear Stearns in New York. Based on that, "it looks to us like pessimism has been overdone in the markets recently."
Financial markets' reaction to Thursday's numbers will determine whether or not that's true. 
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