Americans enjoyed solid pay gains this spring that allowed them to buy new homes at a record rate in June, the government said Thursday in reports that reflected an underlying strength in the U.S. economy and gave the stock market a boost.
Pay and fringe benefits for workers rose 0.9% in the second quarter, the Labor Department said in its employment cost index measure of employee compensation.
That followed a 0.7% gain in the first quarter and brought the rate of increase over the last 12 months to 3.5%--the highest since 1993 and twice the inflation rate of 1.7% for the trailing year.
Benefit costs rose 0.8%, a sharp pickup from the 0.4% rise in the previous quarter.
In a separate report, the Commerce Department said sales of new homes jumped to a record annual rate of 935,000 in June, up 3.8% from the previous record pace of 901,000 in May.
“The domestic economy is going great,” said analyst David Wyss at Standard & Poor’s/DRI, a consulting firm.
“Consumers are spending money like it’s going out of style and they are buying houses at a record pace,” he said. But he warned that risks remain from Asia’s economic turmoil, which has hurt U.S. exporters and swelled the trade deficit.
Strong wage growth and the booming housing market underscore strength in the consumer sector, which accounts for about two-thirds of the economy.
Financial markets welcomed the data, which showed a healthy economy but did not signal the kind of excessive strength that could spur worries about inflation and prompt the Federal Reserve Board to raise interest rates.
The Dow Jones industrial average jumped 111.99 points, or 1.3%, to 9,026.95. The key 30-year Treasury bond’s price rose, sending its yield, which moves in the opposite direction, down to 5.72% from 5.76% on Wednesday.
The employment cost index is a favorite indicator of Federal Reserve Board Chairman Alan Greenspan, who warned Congress last week that he was worried about potential inflationary pressures if wages picked up too fast.
Signs that the U.S. economy has been slowing because of Asia’s problems were expected to temper his concerns.
Labor costs have risen steadily in recent years as unemployment has fallen--the jobless rate is 4.5%, a shade above its 28-year low of 4.3%--although many economists are surprised wages have not picked up even faster.
Analysts said the labor cost data will keep the Fed on guard but would not spur the central bank to raise short-term rates.
In another report that reinforced the picture of a healthy job market, the Labor Department said new claims for jobless benefits fell to 304,000 last week from 317,000 the prior week. It was the lowest since 288,000 the week of April 11.
The pickup in home sales was a surprise because Wall Street analysts had forecast a moderate slowdown to a rate of 888,000. Analysts said all indicators were positive for the economy’s housing sector heading into the second half of the year.
Sales ran a robust 15.4% higher than a year earlier, when home sales were at a rate of 810,000 a year.
Moreover, the monthly supply of new homes for sale fell to 3.7 months’ worth in June, the lowest on record. That means construction activity should remain vigorous as builders race to keep up with demand.
STOCKS BOUNCE BACK: The Dow rises nearly 112 points. D4