Labor Costs Only Up Slightly, Report Says

The powerful rally in financial markets Tuesday was triggered by signs of a slowing economy--government reports showing only a modest rise in first-quarter employment costs and lower orders for manufactured goods in March.

Analysts said the government reports suggested the economy, while still expanding, might not be as close to overheating as feared. That might encourage Federal Reserve policymakers to hold off on more interest-rate rises in May.

The Labor Department said its employment cost index showed that nearly flat costs for company-supplied benefits like health care between January and March offset higher wage and salary costs to restrain the index’s increase to 0.6%.

That was an improvement from a 0.8% rise during last year’s fourth quarter. The index measures combined wage and benefit rises that eventually get passed on in costs and so are a measure of potential price changes.

Separately, the Commerce Department said March orders for durable goods dropped 3% to a seasonally adjusted $171.5 billion. It was the biggest monthly decline since a 3.6% fall last August.

The reports muted concerns that the Fed might already be on a course of successive short-term interest-rate rises to curb demand.

The central bank’s policy-setting Federal Open Market Committee boosted rates by a quarter point March 25 and meets again May 20.

“The froth seems to have been kicked out of the manufacturing sector, at least while the employment cost index is extremely well-behaved,” said Robert Dederick, economic consultant to Northern Trust Co. in Chicago.

“It’s an economy that is just continuing to be the best that it can be,” he said.

U.S. companies have been able to slow their benefit costs in recent years by shifting more costs to employees and using cheaper managed-care plans. But some Fed officials and private economists caution that employers have saved about as much as they can this way, so costs may rebound.

Nonetheless, economist Anthony Chan of Banc One Investment Advisers in Columbus, Ohio, said the bright first-quarter performance does not make a case for immediate rate rises.

“This report, I think, argues for complacency rather than for immediate urgency on the part of policymakers,” he said.

The report on durable goods--costly items such as cars and appliances intended to last three years or more--showed slacker demand in every major category.

Transportation orders fell 4.3% in March after a 7.3% decline in February. The department said orders fell for both new aircraft and parts and for new cars and parts.

The biggest percentage decline occurred in orders for electronic and electrical equipment, down 5.9% after a 7.7% increase in February.

The Commerce Department said orders were softer for communications equipment and for electronic components.

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Consumer Confidence

From a monthly survey of 5,000 households. Index: 1985=100:

April: 116.8

Source: Conference Board

Durable Goods

New orders, in billions of dollars, seasonally adjusted:

March: $171.5