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GDP up 4.8%; wages tame
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October 28, 1999: 5:06 p.m. ET
3Q employment costs gain 0.8%; inflation gauge comes below forecasts
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - The U.S. economy posted its strongest quarterly advance this year while wage costs remained tame, the government said Thursday -- signs that robust consumer spending coupled with the lowest unemployment in a generation aren't fueling inflation.
Wall Street rallied after the reports, as investors bet the Federal Reserve now will refrain from raising interest rates again when policy-makers meet next month. The Dow Jones industrials surged more than 229 points, a gain of more than 2 percent. In the bond market, always sensitive to inflation, the 30-year Treasury jumped nearly a point, pushing its yield, which moves inversely to the price, down to 6.25 percent from 6.32 percent Wednesday.
"Increases in capacity, along with improvements in productivity performance, have made possible increases in living standards without inappropriate inflationary pressures," U.S. Treasury Secretary Lawrence Summers said Thursday.
"This is great news," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. "These are very helpful numbers to those -- including us -- who think the Fed will not raise rates next month."
The numbers
Gross domestic product grew at a 4.8 percent rate in the third quarter, a shade above economists' forecasts and well above the revised 1.9 percent rate in the second quarter. GDP, reported by the Commerce Department, is the broadest measure of the nation's economy.
The GDP price deflator, a key inflation gauge, rose at a 0.9 percent annual rate, below forecasts of 1.2 percent and the 1.1 percent rise in the second quarter.
Labor costs, meanwhile, rose at a 0.8 percent rate in the quarter, the Labor Department said, below forecasts for a 0.9 percent increase and the 1.1 percent rise in the second quarter. The seasonally adjusted index measures companies' wage, benefit and salary costs over a three-month period.
Taken together, the numbers signaled what a growing number of economists and at least one senior Fed official have been cautiously talking about for months -- that the United States' economy can grow well above its traditional "speed limit" of 2 to 3 percent without sparking excessive inflation.
The technology age
Some analysts and investors have been forecasting an end to the 8-1/2-year-old expansion, which, if it continues, will soon become the longest on record in the United States.
Traditional economic models say strong growth and record employment -- features of the economy for several years now -- should have led to a pickup in inflation, and eventually, a recession.
But that has yet to happen -- something a growing number of economists attribute to rising productivity -- or more worker output per hour -- as well as stiff global competition. A big contributor has been technology -- including the Internet -- which allows people to work more efficiently and allows companies to reduce costs and keep a lid on prices to compete.
To reflect that, the Commerce Department has changed the way it calculates GDP, introducing the revisions in Thursday's report. The changes mean GDP now includes software and financial services output, among other things, which has given a small boost to overall growth, analysts said.
A 21st century GDP
As a result of the revisions, the statistics now better measure productivity and better reflect the economy's growing dependence on technology, said Brian Wesbury, chief economist at Griffin Kubik Stephens and Thompson.
"All of a sudden, this mystery of strong growth and low inflation doesn't seem such a mystery any more," Wesbury said. "This is exactly what the new economy is all about."
The government also revised growth for all of 1998 to 4.3 percent and for 1997 to 4.5 percent, both faster than the 3.9 percent rate previously reported for each year. First-quarter GDP was revised down to a 3.7 percent rate from 4.3 percent.
Still, some analysts warned that growth remains too strong for Fed policy-makers, who may yet be forced to raise rates again.
Indeed, while the economy is growing at a strong pace and inflation appears tame, consumer spending is still strong, as is business investment.
"These data continue to suggest that labor market conditions are much more robust that recent payroll employment and help-wanted reports have indicated," said Stephen Wood, a senior economist at Bank of America Securities in San Francisco.
Other numbers
The Fed raised rates twice this past summer, each time by a quarter point, but held rates steady when policy makers met Oct. 5, though the central bank said it was leaning toward raising rates.
Thursday's numbers also focused attention on a speech due Thursday evening from Fed Chairman Alan Greenspan on "Technology and the Economy."
"The Fed may tighten anyway despite these favorable news announcements," Richard Hoey, chief economist of Dreyfus Corp., told CNNfn.
Consumer spending, which fuels two-thirds of the nation's economy, rose a still healthy 4.3 percent in the third quarter, down from 5.1 percent in the second quarter and 6.5 percent in the first.
Business investment surged 14.9 percent in the quarter, more than double the 7 percent rise in the April-June period, while business inventories rose $28.1 billion in the third quarter, more than double the $14 billion increase posted the second quarter.
Real final sales, which exclude inventory changes, rose 4.1 percent in the quarter, up from a revised 3.4 percent gain the prior quarter.
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