Rise in wages, benefits slows consumer confidence weakens; Fed viewed as unlikely to raise rates in Nov.

THE BALTIMORE SUN

WASHINGTON -- In signs that inflation will remain subdued, wage, salary, and benefit costs paid by U.S. employers rose at the slowest pace in a year during the third quarter, and consumer confidence in the economy weakened this month, reports showed yesterday.

The Labor Department's employment cost index increased a smaller-than-expected 0.6 percent after rising 0.8 percent in the second quarter. Wages alone showed the smallest quarterly increase since the third quarter of 1992. Analysts had expected a 0.8 percent increase in third quarter labor costs.

Also yesterday, the Conference Board's index of consumer confidence declined this month after soaring to near-record highs a few months earlier. The index declined to 106.2 for October from 111.8 during September.

Bonds rallied after the reports pointed to slower economic growth. It's "music to the ears of financial markets," and suggests inflation is under wraps, said Anthony Chan, chief economist at Banc One Investment Advisors Corp. in Columbus, Ohio. Labor costs account for two-thirds of consumer prices for goods and services. "We don't have an inflation threat," said David Resler, chief economist at Nomura Securities International New York.

The employment cost index is considered the most accurate measure of wages, salaries, and benefits -- and less volatile than the average hourly earnings statistics in the government's monthly employment report. The index measures compensation per hour, including wages, salaries, and costs for benefits.

The labor cost report particularly suggests the Federal Reserve's policy-making arm, the Federal Open Market Committee, will again refrain from raising interest rates at its next meeting, Nov. 13, analysts said.

"This number gives the Fed absolutely no reason to act," Chan said.

That's because the ECI has "shown a strong correlation with inflation," said Robert Freedman, chief investment officer of the $22 billion John Hancock Funds in Boston.

By category, wages and salaries rose 0.6 percent during the third quarter -- the smallest quarterly increase in four years -- after rising 0.9 percent in the second quarter. Benefit costs also increased 0.6 percent during the third quarter after climbing 0.7 percent in the second quarter.

The report "adds another nail to the coffin" to the theory that low unemployment will -- in and of itself -- trigger accelerating inflation, Resler said.

Still, employment costs may rise a bit faster in the current fourth quarter, in part because of a 50-cents-an-hour, election-year increase in the minimum wage that took effect Oct. 1.

A study by the Federal Reserve Bank of San Francisco estimates that the minimum wage increase will boost paychecks of all American workers by 0.4 percent over the coming year. "The inflationary impact of the full minimum wage increase appears to be a one-time small increase," said Robert Valletta, an economist at the Fed's San Francisco branch.

The yield on the benchmark 30-year Treasury bond, a gauge of inflation expectations, slid to 6.68 percent from 6.83 percent. The Dow Jones industrial average rose 34.29 to 6,007.02. The Nasdaq composite index, however, declined almost 13 points.

Though the news on inflation was good for bond investors, it means total compensation for the average worker hasn't kept pace with inflation.

"People keep talking about how well the economy is doing, and frankly I just don't see it," said Laverne Batten, an Atlanta educator. "We're doing OK, we're getting by, but I don't have more savings or a better standard of living or anything. My salary has stayed pretty much the same."

For the 12 months ended Sept. 30, employment costs increased percent, up from 2.7 percent for the 12 months ended Sept. 30, 1995.

Pub Date: 10/30/96

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