| BUSINESSWEEK ONLINE : AUGUST 16, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Wage Inflation: Just a Phantom After All? By now, Fed-watchers everywhere know what Alan Greenspan's favorite barometer of inflation is. It's the Employment Cost Index (ECI), which attempts to measure the total change in wages and compensation throughout the workforce. So there was a simple reflex on Wall Street when the second-quarter ECI registered an unexpectedly high 1.1% gain: sell, sell, sell. The Dow Jones industrial average plunged nearly 200 points on July 29, and bonds plummeted as the yield on the benchmark 30-year Treasury bond shot up to 6.07%. Yields have since continued to rise as stocks have gyrated. But the Street may have misunderstood the ECI's signal. Sure, the second-quarter runup looked big compared with the first quarter's 0.4% jump, and it was considerably higher than the 0.8% increase economists expected. But investors failed to look at the number the way Fed policymakers do: on an annualized basis. Between June, 1998, and June, 1999, the ECI rose just 3.2%. That's actually less than the 3.5% gain posted in the prior 12 months. ''I don't see anything in the behavior of these numbers that would heighten my inflation concern beyond the level of recent quarters,'' says Richmond Federal Reserve Bank President J. Alfred Broaddus Jr., one of the central bank's leading inflation-phobes. TAME FIGURES. In fact, the Fed may not feel it has to hike rates at its Aug. 24 policy meeting. One reason is the surprisingly tame gross domestic product figure that came out the same week. It showed that second-quarter growth slowed to 2.3%, down from the first quarter's torrid 4.3% rate. And beneath the surface, even the second-quarter ECI surprise isn't so scary. Most of the jump came from fat bonuses paid to a select portion of the workforce: mortgage brokers, stock traders, and investment bankers. Thanks to commissions linked to a robust housing market and sizzling stock trading, their compensation rose a strapping 3%. Outside of a few other hot job categories, however, a different picture emerges. Manufacturing workers saw compensation increase only 0.6%; construction workers, only 0.5%. Both numbers were in line with wage trends. ''It's hard to say we're on the verge of a wage-price spiral,'' concludes Mark P. Vitner, economist at First Union Corp. in Charlotte, N.C. Furthermore, none of the compensation data take into account ongoing productivity gains. Fed insiders calculate that, at current productivity levels, annual wage increases of up to 4% are manageable. Says Federal Reserve Governor Edward W. Kelley Jr.: ''Our productivity gains have been so strong that the unit cost of production has remained flat, which is just wonderful.'' So, if the ECI turns out to be harmless, what will the Fed focus on before rendering a verdict at its next meeting? Topping the list will be the July employment report, due out on Aug. 6. The Fed also will rely heavily on the Aug. 5 release of second-quarter productivity data. In particular, the governors will look at the rate of productivity growth for nonfinancial corporations, which is considered a more precise measure of efficiency because it strips out Mom-and-Pop outfits and banks, whose productivity is especially hard to gauge. Finally, consumer and producer prices will be out mid-month. If any of these indicators sets off alarm bells, then the Fed could order another interest-rate hike. But on the basis of Greenspan's favorite gauge--the ECI--there seems to be little conclusive evidence of inflation to force its hand. That still leaves financial markets ready to twitch at the next sign of a sinister economic indicator. By Laura Cohn in Washington _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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