Strong Growth, Labor Costs Hold Inflation Levels in Check

THE JOURNAL RECORD, May 1, 1998 | Go to article overview

Strong Growth, Labor Costs Hold Inflation Levels in Check


WASHINGTON (Bloomberg) -- The U.S. economy grew at the fastest pace in a year during the first quarter and a smaller-than-expected increase in labor costs helped push down inflation to levels not seen since Dwight Eisenhower was in the White House.

"It's a new era," said John Ryding, senior economist at Bear Stearns in New York. "Strong growth, no inflation, get it? A lot of economists don't, but investors are beginning to. These are just phenomenal reports."

Gross domestic product increased at a 4.2 percent annual rate in the first quarter as consumer spending rose at the fastest pace in six years, the Commerce Department said Thursday. That's up from a 3.7 percent rate in last year's final quarter and it's the best showing since a 4.9 percent GDP advance in the first quarter of 1997 for the measurement of the nation's total output of goods and services. Also during the first quarter the employment cost index -- the broadest measure of wage, salary and benefit costs -- rose 0.7 percent, down from a 1.0 percent rise in last year's fourth quarter, the Labor Department said. Analysts were expecting a 0.9 percent rise for the first quarter. The combination helped hold down two key measures of inflation. The GDP price deflator rose at a 0.9 percent annual rate in the first quarter, the smallest increase since 1964. And the domestic purchases deflator -- which tracks prices paid by consumers for domestic goods -- actually fell 0.1 percent, the first time that's happened since 1959 when Eisenhower was president. Stocks and bonds surged after the reports, which were "very pleasing," said William McDonough, president of the Federal Reserve Bank of New York and a voting member of the Fed's policymaking Open Market Committee. "I believe in strong economic growth." San Francisco Federal Reserve Bank President Robert Parry said strong growth is just what the United States had in the first quarter -- "extraordinarily strong." There are signs, Parry added, that the second quarter won't be like the first. "We may have seen the economy start to slow," he said. The current expansion entered its eighth year in March. "It's impossible for the Fed to justify a rate increase under these conditions," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens and Thompson in Chicago. A separate report showed Midwestern manufacturing activity grew at a slower pace in April than in March as new orders and production both declined. …

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Strong Growth, Labor Costs Hold Inflation Levels in Check
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