Wages Increase Moderately, Report Says

Although hardly cheery news for America’s employees, a report showing only a modest rise in workers’ wages and benefits sent financial markets soaring Tuesday.

Wall Street welcomed the news both because it suggested that corporate profits weren’t being eroded by rising labor costs and because the lack of inflationary pressure might persuade the Federal Reserve Board not to raise short-term interest rates next month, a move that has been widely predicted.

The labor cost figures “show that compensation gains remain moderate, posing no inflationary threat,” said White House economist Janet L. Yellen. “Workers are experiencing real wage gains well in line with their productivity.”

Meanwhile, other reports showed a sharp drop in factory orders and slight decline in consumer confidence, hints that the economic growth may be moderating from the rapid pace of the last six months.

The Dow Jones industrial average shot up by 179.01 points--a 2.6% gain and its second-largest point gain ever--to close at 6,962.03. The average, after plunging nearly 700 points between March 11 and April 11 on fears of rising inflation and interest rates, has recovered more than three-quarters of the loss.

At the same time, rising bond prices pushed down interest rates in credit markets.

In its report, the Labor Department said its employment cost index, or ECI, which measures changes in wages and benefits, rose 0.6% in the January-March period. That was only two-thirds as much as many analysts had anticipated and less than the 0.8% for the previous three months.

Analysts, Fed officials and Clinton administration economists all had been expecting a larger number because labor markets are so tight in many parts of the country, there are shortages of technical and other skilled workers in a variety of industries and the national jobless rate was 5.2% in March--a level that in the past has been associated with rapid pay increases.

Indeed, wages for civilian workers did rise 0.9% in the first quarter, slightly more than in the preceding three quarters, but still less than the 1% increase in the first quarter of last year.

But the cost to employers of benefits, such as vacations, pensions, health insurance, worker’s compensation and other fringes, increased just 0.1%, which held the rise in the overall employment cost index to its 0.6% gain. For the 12 months ended in March, the ECI was up 2.9%, the same as for the year ended in December.

Many forecasters expect growth to slow in the current quarter, with consumer spending easing after soaring early this year. If the ECI report is accompanied by signs of slower growth, the Fed might decide at its policymaking session May 20 to wait and see what happens rather than raising rates again, some analysts said.

“If I am a Federal Reserve official, I’d say this gives us some breathing room,” said Roger Brinner, chief economist at DRI/McGraw-Hill Inc.

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Consumer Confidence

From a monthly survey of 5,000 households. Index: 1985=100:

April: 116.8

Source: Conference Board

Durable Goods

New orders, in billions of dollars, seasonally adjusted:

March: $171.5