GDP Growth Slows to a 5.4% Rate, But Employment Costs Jump 1.4%
An INTERACTIVE JOURNAL News Roundup
WASHINGTON -- The economy grew at a slower rate than expected in the first quarter, but a surprisingly strong uptick in employment costs signaled renewed inflationary pressure.
Gross domestic product, or the country's total output of goods and services, increased at a 5.4% annual rate during the first quarter, the Commerce Department said Thursday, propelled by the biggest jump in consumer spending in nearly 17 years. The increase was weaker than the 6% rate many economists were expecting, according to Thomson Global Markets.
But first-quarter worker compensation costs rose at the fastest pace in nearly 11 years. The Labor Department said the employment cost index rose 1.4%, an acceleration from the fourth quarter's 1% increase. Economists had expected the ECI to increase just 0.9%. Year-over-year, the index grew at a 4.3% rate, the quickest pace since the fourth quarter of 1991.
Still Signs of Inflation
The GDP growth in the first quarter was slightly slower than the breakneck 7.3% rate posted in the last three months of 1999 -- the strongest showing in nearly 16 years. However, the latest performance was still faster than the 3.5% to 4% rate that the Federal Reserve regards as sustainable without triggering inflation and it shows that the record-breaking economy didn't lose a lot of momentum at the beginning of the year.
First-quarter growth was led by a whopping 8.3% rate of increase in consumer spending -- the largest gain since a 8.6% rate posted in the second quarter of 1983.
The Fed, fearing that unchecked growth could worsen inflation, has raised interest rates five times since June 30 to slow the speeding economy. Given the outlook for continued strong growth, many economists believe the Fed will boost interest rates on May 16 and again in June.Thursday's data could spur fears that the central bank will embark on an even more aggressive policy to tighten the money supply. The last year's rate increases have been quarter-point steps, but some analysts have feared the Fed could boost rates by half of a percentage point.
While the main GDP figure came in below expectations, the Commerce Department report carried worrisome news about inflation. The Fed-favored price index for personal-consumption expenditures and the broader index for domestic purchases each rose faster in the first quarter than at the end of 1999.
The PCE index rose at a 3.2% annual rate in the first quarter and a 2.4% rate when compared with a year earlier. That's up from a 2.5% pace and 2% year-over-year rate seen in the fourth quarter. The quarterly gain was the largest jump since the third quarter of 1994, when it surged 3.5%.
The PCE index advance was led by the run-up, which has since subsided somewhat, in energy prices. Excluding food and energy, the index rose at only a 1.8% pace. The index has taken on new prominence among inflation-watchers since the Fed chose it to replace the consumer-price index in its semi-annual Humphrey-Hawkins monetary report to Congress.
Another widely-watched inflation gauge in the report, the index for gross domestic purchases, rose at an 3.2% pace in the first quarter, compared with a 2.3% pace in the fourth quarter. Energy prices, as well as a pay raise for federal employees, boosted the index. Without food and energy, the purchases index rose at a smaller 2.1% rate, up from 1.9% in the previous quarter.
As has been the case through much of the current record-setting economic expansion, consumer spending was the driving force in the first quarter. Spending rose at an 8.3% annual rate in the first quarter, the fastest pace since the 8.6% pace seen in the second quarter of 1983. The gain was led by a sharp increase in spending on durable goods, big-ticket items meant to last three or more years. Spending on those shot up at a 26.6% annual rate, the fastest pace since the third quarter of 1986.
Business investment also ramped up, rising at a 21.2% rate. Investment in equipment and computer software rose at its fastest pace in two years, possibly reflecting pent-up demand that had been delayed by the year-2000 date changeover.
Meanwhile, inventory growth, which had been expected late last year to depress growth substantially after a run-up prior to Y2K, subtracted 1.39 percentage points from GDP, the Commerce Department said. The trade deficit clipped about 1.31 percentage points off of first quarter growth.
The Commerce Department will revise its GDP for the first quarter twice more times, with the preliminary report set for May 25.
Employment Costs Will Rattle Markets
Meanwhile, the employment-cost figures can be expected to rattle inflation-wary investors.
Economists worry that employers, already faced with the tightest labor market in three decades, will raise prices as they are forced to spend more money attracting and retaining workers.
Over the past five years, subdued first-quarter benefit cost increases have helped contain compensation costs. But benefit costs, which represent nearly a third of the entire employment cost index, rose 2% in the first quarter, reflecting the higher price of health insurance and rising bonuses in the financial sector. In the private sector, benefit costs rose 2.3%, accelerating from a 1.1% gain in the fourth quarter.
The other 70% of the ECI , wages and salaries, also gained speed in the first quarter, rising 1.1% after a 0.9% boost in the final period of 1999. Wages and salaries for private-industry workers rose at a faster rate than for state and local government workers -- gaining 1.2% compared with 0.9% for government employees.
Wages and salaries in the finance, insurance and real-estate sector surged 2.4% in the first quarter, rising almost five times faster than in the fourth quarter. Construction wages and salaries advanced 1.8%, following a 0.9% rise in the fourth quarter. In the retail trade, wages and salaries rose 1.7% in the first quarter, after a 0.9% increase in the previous period.