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U.S. labor costs rise
April 26, 2001: 11:34 a.m. ET

Employment cost index makes strong gain, but unemployment claims also rise
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NEW YORK (CNNfn) - Labor costs rose in the United States in the first quarter, the government reported Thursday, matching Wall Street forecasts, while weekly jobless claims rose to the highest level in five years.

The Labor Department said its Employment Cost Index for U.S. businesses, which measures workers' wages and salaries and is closely watched for signs of inflation, rose 1.1 percent in the quarter, in line with Wall Street forecasts. Costs gained 0.9 percent in the fourth quarter of 2000.

Benefit costs rose 1.3 percent, while wages increased 1 percent, the department said in its report. Both gains were higher than last quarter's gains.

Federal Reserve policy makers have been keeping 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 interest rates four times this year in an effort to bolster the economy, and any signs of higher inflation could make the central bank think twice before cutting rates further.

"It's a large gain," Anthony Crescenzi, bond market strategist with Miller Tabak & Co., told CNNfn's Before Hours program. "If the ECI grows at 1.1 percent each quarter, you're going to have a 4.5 percent compounded annualized rate of gain. That's a big increase, well above the inflation rate, which is currently around 3 percent."

But this quarter's gain was smaller than the gain in the first quarter of 2000, when labor costs rose 1.3 percent, and economists are not greatly concerned yet about inflation.

Anthony Chan, chief economist with Banc One Investment Advisors, said the Fed would look past the quarter's troubling number and see strong productivity growth -- which puts downward pressure on prices, counteracting labor costs -- together with a slowing economy and a softening labor market, and keep its rate-cutting bias.

"Policy makers make policy on long-term trends," Chan said. "This is temporary. Labor costs will eventually come down."

Certainly, American workers should not take the data to mean the economy has returned to the days when employers were breaking the bank to hang on to employees.

"Benefit costs went up because of medical care costs," Chan said, "not firms trying to wow employees. They're not wowing employees. Look at the layoff data."

Financial markets weren't bothered by the data, either, as stock prices posted modest gains.

Unemployment claims

Emphasizing the weakness in the job market, new claims for jobless benefits jumped to 408,000 last week, the highest level in five years, the government said in a separate report.

The Labor Department said first-time claims for state unemployment benefits rose 18,000 from a revised 390,000 the week before. It was the highest reading since March 23, 1996, when claims reached 428,000. Economists surveyed by had estimated claims at 390,000 for last week.

The four-week moving average, which smoothes weekly fluctuations and gives a more accurate picture of jobless trends, rose to 394,500 from 383,750.

While the weekly claims data are the highest in five years, Crescenzi noted that during the last recession, the new claims level stayed above 450,000 for about a year and a half, while the U.S. population was 13.2 percent lower than it is today.

"As alarming as this is -- and the trend is certainly not very favorable -- it's not like it was in the last recession," Crescenzi said.

Many economists think the United States will avoid a recession this time around, according to a poll released by the National Association for Business Economics Thursday.

The NABE said 55 percent of 131 members polled this month estimated economic growth of 1 percent or less during the first six months of 2001, but most NABE members still aren't worried about the U.S. economy sinking into a recession, commonly defined as two straight quarters of economic contraction. graphic