Wages, Benefits Surge in U.S. as Economy Slows

Americans’ wages and benefits climbed faster in the last three months than at any time since 1991, while economic growth slowed to a still respectable 2.3% annual rate, the government said Thursday.

The combination represented more good economic news for average working people but left inflation-jittery investors shaken. The Dow Jones industrial average dropped 180.78 points, or 1.7%.

The nation’s wage and benefit bill rose 1.1% from April to June, substantially more than the 0.4% rise of the first quarter and its largest increase since the current expansion began in mid-1991, according to the Bureau of Labor Statistics.

The jump seemed to confirm Federal Reserve Chairman Alan Greenspan’s recent warnings that low unemployment and heavy demand for new workers could send wages and prices spiraling higher. It convinced many that the central bank will soon sharply raise interest rates to break the cycle.

But analysts cautioned that a close look at the numbers shows no abrupt change underway. They said the expansion is still headed for its rendezvous with the record books early next year as the longest boom in U.S. history.

“We’re entering a new phase where inflation begins to pick up and growth slows some, but this expansion has very long legs to it,” said Diane C. Swonk, chief economist at Bank One Corp. in Chicago.

The 2.3% growth rate in the nation’s output of goods and services in the second quarter was substantially lower than what most analysts had predicted and well below the 4.3% rate for the first three months of the year.

Ordinarily, economists would have greeted the slowdown as good news, on the grounds that it will help dampen wage pressures and put the economy on a more sustainable path. But analysts said the easing in the pace of growth was largely illusory, the result more of a decline in the inventories that companies keep on hand than of a substantial letup in economic activity.

Indeed, though American consumers did buy at a somewhat slower pace in the April-June quarter, consumer spending still grew at a handsome 4% rate. Analysts said that what slowdown did occur may have been the result of a statistical fluke, a weather-related jump in spending during the January-March quarter that made the 4% rate look small by comparison.

The same was true of business investment spending, which slowed from its almost 15% growth rate of last fall but which was still an extremely strong 10.8%.

Even where the new figures do show spending growth slowing, analysts either questioned whether the figures are accurate or said they will produce a bounce-back this quarter.

For example, the government said corporate America boosted its inventories just $19.4 billion last quarter, only half as much as in the first quarter. That alone trimmed almost a full percentage point off the nation’s growth rate, the government said.

“There is something suspiciously low about that number,” Swonk said. “I expect you’ll see it go back up next time.”

Attention focused on the wage and benefit statistics because they seemed both to confirm Greenspan’s warnings and to fulfill investors’ darkest fears.

Analysts have puzzled for several years over why wages have remained so tame, and many saw the new numbers as signaling the start of a period of rising wages and prices.

“The economic growth rate is a sidebar,” said Allen Sinai, chief economist with Primark Decision Economics in Boston. “The main event is an acceleration in inflation.”

Although Greenspan repeatedly has said in recent weeks that the central bank will raise interest rates if it thinks inflation is picking up, many analysts discounted his warnings before Thursday.

At least in part, that’s because Greenspan issued similar warnings last month, but the central bank’s governing board did not seem to follow through.

The board raised a key rate a quarter of a point to 5% but simultaneously announced it was removing its tilt in favor of further hikes, a step that many saw as a sign the Fed would stand pat.

Analysts were divided Thursday about whether the new wage and benefit figures would provoke the board to raise rates again when it next meets Aug. 24. But most said further rate hikes are in store before the end of the year.

“Greenspan basically said that labor markets are tight and higher wages are an inevitable consequence. These numbers played right into his worries,” said Mickey D. Levy, chief economist with Bank of America in New York.

However, like Thursday’s economic growth figures, the wage and benefit numbers present a mixed picture. Analysts said that although the numbers for the second quarter are substantially higher than those for the first, much of the difference was the result of an unusual 0.7% drop in the pay of real estate brokers, insurance agents and other financial sector workers during the earlier period and a similarly unusual 3% jump in the later period.

“This is the kind of ‘one-of’ event that is not likely to repeat itself,” said Bruce Steinberg, chief economist with Merrill Lynch & Co. in New York.

For the 12 months ended in June, wage and benefit costs climbed 3.2%, down from the 3.5% rate for the preceding 12 months. The quarterly increase of 1.1% included a 1.2% jump in wages and salaries and a 0.9% rise in the cost of benefits such as health care and pensions.

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WALL ST. SLUMPS: Data send stocks tumbling, but trading is modest. C4