Strong GDP, ECI growth
January 28, 2000: 11:38 a.m. ET
Fourth-quarter growth, wage costs, prices rise at faster rates than forecast
By Staff Writer M. Corey Goldman
NEW YORK (CNNfn) - The U.S. economy finished 1999 with its strongest growth rate of the year while labor costs and prices crept higher, the government reported Friday -- signs that record levels of employment and resilient consumer spending may be starting to ignite inflation.|
Gross domestic product grew at a 5.8 percent annual rate in the fourth quarter, above the 5.5 percent increase expected and the 5.7 percent rate recorded in the third 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 2 percent annual rate, above forecasts of a 1.5 percent gain and the 1.1 percent increase registered in the third quarter.
Labor costs, meanwhile, rose at a 1.1 percent annual rate in the final quarter of the year, the Labor Department reported. That's more than the 0.8 percent gain registered in the third quarter, and also above economists' forecasts of a similar 0.8 percent increase for the fourth quarter. The seasonally adjusted employment cost index measures companies' wage, benefit and salary costs over a three-month period.
Combined, the reports suggested what analysts and investors have been concerned about for some time: that the robust U.S. job market is finally beginning to spur employers to dish out higher salaries and benefits, and that consumers armed with heftier paychecks and backed by paper gains from the stock market are ready and willing to pay more for goods and services.
A negative reaction
"There's absolutely no question that the U.S. economy is on a tear and needs to be slowed," said Richard Babson, president of Babson-United Investment Advisors in Boston. That's going to happen with higher interest rates, starting with next week's Federal Open Market Committee meeting, and possibility continuing through the summer months as the Fed taps on the brakes to slow the economy down, he said.
"If inflation is around the corner, the Fed doesn't want to meet it - it wants to kill it before it gets around the corner," Babson said. "They want to make sure that there are no significant cost pressures in the economy."
Stocks slid into negative territory following the numbers as investors concluded the Fed will likely lift its benchmark lending rate by at least a quarter point next week -- possibly even a half-point, as some analysts have forecast. Bonds extended losses, falling a full point in price before recovering.
Indeed, the fourth-quarter GDP growth rate was the strongest since a 5.9 percent jump in the fourth quarter of 1998. For all of 1999, the U.S. economy expanded 4 percent, the slowest annual advance since 3.7 percent in 1996.
End of an era?
For months, analysts, investors and several Fed officials, including Chairman Alan Greenspan, have publicly embraced the notion of the "New Economy" where rapid gains in technology have made U.S. companies more productive. Higher productivity allows businesses to produce more without dishing out more in expenses, keeping the cost of the final product low.
At the same time, few analysts -- and Greenspan, in particular - ever wholeheartedly agreed that strong growth without any significant gains in wages or prices could last forever. Most have argued that, eventually, workers will demand higher salaries and retailers will boost prices.
The economy's rate of expansion during the past three years has rung in faster than what Fed officials have said can be sustained without a renewed inflation threat. Fed officials have stated at different intervals that a "comfortable" rate of growth is typically around 3 percent.
Speaking earlier this month in New York, Greenspan said that while productivity has brought benefits to Americans in the form of a robust job market, stable consumer prices and unprecedented gains in paper wealth, "the so-called New Economy is spurring imbalances that at some point
will abruptly adjust, bringing the economic expansion, its euphoria, and wealth creation to a grinding halt."
"We've been going at a speed limit that's faster than what's possible, even in the newest of new economies," said Babson said. He's anticipating a half-point increase in rates from the Fed next week, with the benchmark Fed funds rate rising to 6.25 percent by the beginning of summer.
Higher rates make borrowing for consumers and businesses more expensive, ultimately slowing economic growth and keeping prices at levels that won't deter consumers from opening their wallets.
Consumer spending surges
And consumers have definitely been opening their wallets. Consumer spending, which accounts for more than two-thirds of economic activity, grew at a 5.3 percent annual rate in the fourth quarter, up from 4.9 percent in the third quarter and the strongest since a 6.5 percent advance in the first quarter of the year.
Ample jobs and stock market gains fueled confidence among consumers to spend their money on things such as new cars, furniture, home computers and other goods, keeping the economy rolling.
Businesses stocked up their shelves in the fourth quarter, adding goods at a $65.4-billion annual rate, almost double the $38-billion pace in the third quarter. The surge in inventories reflected a build-up in stocks as companies braced for Y2K-related supply disruptions -- disruptions that never materialized. Extra inventories businesses now have may act as a drag on first-quarter production as businesses take time to sell them off.
As for employment costs, higher benefit expenses boosted the overall index, the Labor Department said. Workers' wages and salaries jumped 0.9 percent in the fourth quarter, the same pace registered in the third quarter. Benefit costs, however, gained 1.3 percent, stronger than the 0.8 percent gain measured in the prior period.
While much of the gains came in the form of benefits -- a difficult indicator for Wall Street to prejudge in the same way other economic data can be anticipated -- "there should be no doubt; overall, this report is bad news," said Ian Shepherdson, chief U.S. economist with High Frequency Economics.
The labor cost report was slated for release Thursday but was postponed by a day due to snowstorms in the Washington area earlier this week.