A lower-than-expected increase in wage and benefits costs helped ease worries yesterday that the Federal Reserve will raise interest rates next month and sent stock prices soaring.
The Dow Jones industrial average, the most widely followed market gauge, rose 227.64 points, closing at 10,622.53. The rally extended Wednesday's 92-point gain. It was the Dow's biggest advance since it rose 235.24 on Sept. 3.
The market has been dominated in recent weeks by debate on inflation and interest rates. "When the economic numbers came out today more positive than negative, stocks rocketed and just took off," said Morry Zolet, senior vice president of investment for Ferris, Baker Watts Inc. in Baltimore.
The market rallied on the release of two government reports:
The Labor Department announced that workers' wages andbenefits rose 0.8 percent July through September, which was slightly lower than the 0.9 percent increase many economists expected. The employment cost index was down from the 1.1 percent increase in the second quarter.
The gross domestic product, which measures the total output of goods and services, grew 4.8 percent, far stronger than the sluggish 1.9 percent rate in April through June when America's soaring trade deficit cut sharply into growth, the Commerce Department reported.
"Basically, the employment cost index is the figure of the day," said Diane Swonk, chief economist with Bank One Corp. in Chicago.
Investors interpreted the benign increase in labor costs as an indication that inflation is in check and that the Fed won't need to raise rates for the third time this year when it meets Nov. 16, Swonk and others said.
President Clinton took note of the GDP figures, reminding an audience of educators that the economy has grown at an annual rate of 4.1 percent since 1996.
"And all of this with the lowest inflation rate in decades while we were actually cutting the size of the federal government," he said. "It's virtually, as far as I know, unprecedented in our time."
Clinton's undersecretary of commerce, Robert Shapiro, said, "The American economy is well on its way to the longest expansion in the country's history and the soundest expansion in decades."
For weeks, with the release of each new economic statistic, the Dow has bounced like a pinball between 10,000 and 11,000, said Andrew Brooks, vice president and head of trading at T. Rowe Price Associates Inc.
"What we are seeing is some better economic data, and we have seen it all week," he said. "Now some of the numbers are suggesting inflation is under control, or looks a little better, and the economy has slowed a touch."
Hopes that interest rates may hold steady helped banks' stocks for the second straight session. Citigroup rose $2.81 to $54.12, and American Express soared $10.37 to $161. Chase Manhattan rose $5.81 to $88.56.
Banks are especially sensitive to rising rates because higher rates can discourage customers from borrowing money, cutting into lending volume.
Bank, insurance and financial stocks also benefited from recent bank reform legislation that appears headed for passage by Congress and for Clinton's signature. The legislation would remove Depression-era restrictions and allow banks, insurers and brokerages to enter each other's business.
"Banks and insurance stocks have been flying all week," said Peter Canelo, U.S. investment strategist for Morgan Stanley Dean Witter in New York.
Some say the market was poised to rally on any good economic news. Most stocks have been down for a year and a half, said Walter Murphy, senior international market analyst with Merrill Lynch. "The market is close to the bottom," he said.
"The market is getting ready to complete this long sideways correction we've been in for six or seven months," said Canelo, who predicts that the market may reach highs by the end of this year or early next year.
A lot depends on the Federal Reserve and interest rates.
Bank One's Swonk doesn't expect the Fed to raise rates until February. "Right now, there is no urgency to do it," she said. "This is not 1994, when the Fed raised rates a full 2 percentage points."
Other economists said they are waiting for next week's unemployment figures to determine which way the Fed is leaning.
Wire reports contributed to this article.