NEW YORK (CNNfn) - Retail sales were unchanged last month while worker productivity rose at a much faster-than-expected pace in the third quarter, the government reported Friday, the latest signs of tame inflation in the world's largest economy.
Retail sales were flat in October, the Commerce Department said, in line with economists' forecasts. Excluding autos, sales rose 0.5 percent, slightly above the 0.3 percent gain expected. Worker productivity, meanwhile, jumped 4.2 percent in the third quarter, the Labor Department said, well above the second-quarter gain of 0.6 percent and predictions of a 3 percent increase.
Together, the reports reinforced the view that the U.S. economy is running at a strong, albeit non-inflationary, pace. At the same time, economists were hesitant to interpret the numbers as a surefire sign the Federal Reserve will hold off raising interest rates again when its policy makers meet Tuesday to discuss monetary issues.
Bonds reacted favorably to the reports, with the benchmark 30-year Treasury gaining half a point in price.
"The numbers look great but it doesn't seal the fate on having no increase in rates next week," said Dick Berner, chief economist at Morgan Stanley Dean Witter in New York. "It seems to be there are still some upside risks to inflation pressures."
Investors are still unclear about what the Fed's policy makers, members of the Federal Open Market Committee, will do about interest rates when they gather around the oblong oak table in Washington next week. The central bank held rates steady in October after raising them twice during the summer in a bid to ward off inflation.
Keeping more productive
Increased productivity has helped keep inflation low as companies have used the Internet, wireless phones and other high-tech tools to allow workers to produce more per hour, helping boost sales and profits while keeping wage increases in check. Also, compensation in other forms, particularly stock options, has kept wages from rising.
Unit labor costs, a measure of companies' wage expenses, rose 0.6 percent, well below the 4.2 percent revised gain in the second quarter and less than the 1.4 percent increase anticipated. That was the lowest increase since a 0.5 percent gain in the fourth quarter of 1998.
Even so, both falling wage costs and rising productivity gains were largely expected by Wall Street after the government announced revisions to the way it calculates the numbers. Those revisions were unveiled in the third-quarter gross domestic product and employment cost index reports, released by the Labor Department last month.
The question is how long that can continue," Berner said. "We're seeing great productivity, but also great compensation growth, which is money people are eventually going to spend.
"How the Fed sees that will be evident after next week's meeting," he added.
For Berner, it boils down to the three consecutive interest rate cuts the Fed implemented in 1998 to counter Russia's debt troubles, economic woes in the Far East and the near-collapse of hedge fund Long Term Capital Management. So far, the Fed has taken back two of those cuts, one in June, the other August.
Reversing 1998's cuts
A third rate hike Tuesday would reclaim the last quarter-point of last year's cuts and allow the Fed some time to see how its recent rate increases slow the U.S. economic engine, which has been moving forward for almost nine years without recession.
"The world is a safer place and the economy certainly doesn't need any help," Berner said. "If they tighten again in November, then the steps they've taken in three moves should meaningfully diminish the chances of inflation picking up going forward."
But other economists don't see the need for that third rate increase to come next week.
"Strong but moderating retail sales and improving productivity suggest an economy that should continue to grow while avoiding overheating," said Oscar Gonzalez, an economist at John Hancock Securities in Boston. "The reports would seem to make it less likely that the Fed will need to move again this year."
Maybe less likely, but not completely out of the question, according to the yield on the November Fed funds futures contract.
The yield on the contract, the closest measure of market expectations about Fed policy, currently rests at 5.32 percent, close to the 5.25 percent Fed funds rate. That suggests investors are betting the Fed will hold off making a move.
One thing that may spur the Fed to action next week is the strong pace of consumer spending, which all told accounts for about two-thirds of U.S. economic output.
Retail sales remain strong
Retail sales have held steady or climbed this year and are up 8.5 percent from a year ago, according to the government's calculations. Compensation, hefty stock market gains, rising real estate values, unemployment at a 29-year low, and tame inflation have all helped give retailers a very strong year.
Recent indicators have suggested that may be changing. New home sales have declined, factory orders have dropped and personal income and spending levels have leveled off -- all a reflection of recent increases in borrowing costs for consumers.
More of that is exactly what the Fed needs to see, Berner said. "The fact is, consumer spending growth isn't slowing enough," he said. "The numbers look pretty healthy, but I don't see any dramatic slackening in pace."
New car and truck sales fell by 1.6 percent in October following a 2 percent decline the month before. Furniture sales fell 0.9 percent and sales at general merchandise stores slipped 0.1 percent. Offsetting those declines was a 1.7 percent jump in sales at hardware and building supply stores and a 0.9 percent increase at accessory stores.