Reports renew interest rate concerns

Wages and factory orders post their biggest gains in nine years, which may trigger the Fed to increase rates again.

By JEFF HARRINGTON

© St. Petersburg Times, published July 28, 2000

TAMPA -- Six months ago, Carolyn Ellison quit her paralegal post for another job that required less expertise just two blocks away in downtown Tampa.

And she pocketed an $8,000 pay raise as a result.

So it came as no surprise to Ellison to hear that fresh economic data show the paychecks of Americans are creeping up in this hypercharged economy.

Wages and benefits rose 4.4 percent between June 1999 and last month, the biggest jump in nine years, according to figures released Thursday by the U.S. Labor Department.

Two other indicators issued Thursday also were at odds with the widely held view that the economy is cooling and may add to pressure on the Federal Reserve to start raising interest rates again:

Thanks to a record increase in demand for aircraft, orders to U.S. factories for big-ticket durable goods surged by 10 percent, another nine-year high.

And the number of Americans filing new claims for unemployment benefits declined by 40,000 last week to 272,000 as auto manufacturers began rehiring workers who had been laid off.

The Federal Reserve has raised interest rates six times over the past 13 months to raise borrowing costs enough to slow consumer spending, the main engine of economic growth, and keep inflation under control. Its next meeting is Aug. 22.

The 12-month increase in the Labor Department's Employment Cost Index, a closely watched gauge of inflation pressures, was up from a 4.3 percent increase for the 12 months ending in March of this year.

While only a slight uptick from the previous quarter, the 4.4 percent increase was the biggest gain in wages and salaries since a 4.6 percent rise in June 1991.

The gain was driven in part by a 5.3 percent increase in benefits, largely to pay for rising health care costs.

Cynthia Latta, economist at Standard & Poor's DRI, said that while the huge jump in durable-goods orders will attract notice at the Fed, the slower growth in employment costs in the second quarter, compared to the first quarter, should provide assurance that inflation isn't getting out of control.

"The Fed doesn't have any problem with a strong economy as long as it doesn't set off inflation," she said.

Florida, in particular, has benefitted from the hot economy. More than 305,000 jobs were added across the state in the past year alone, with the quality of jobs improving considerably, said First Union economist Mark Vitner.

Lynn Reaser, chief economist for Banc of America Capital Management Inc., said she is not overly concerned about wage and benefit increases as long as productivity gains continue. "This is certainly a yellow flag for the Fed; it is not a flashing red flag," she said.

"Part of this is people are in fact seeing an increase in their wages, not through their current job but moving on to a higher position in a different company or the same company," she added.

Ellison, the legal assistant in downtown Tampa, said in her 20 years in the business she's never seen such upheaval in law firms trying to outbid each other for employees.

"We've lost four attorneys and an office administrator to other firms," she said. "You can't blame them. If you can do the same job for more money somewhere else, why not?"

At Mercantile Bank in St. Petersburg, chief executive Gordon Campbell is trying to get his arms around employee retention. He routinely surveys area banks and said he tries to keep salaries of his 200 employees slightly higher than pay at the big banks.

"Last year the increases were between 3 and 4 percent, which wasn't that bad," Campbell said.

Martin Marrero found moving can provide a de facto salary boost.

Marrero works for the Millennium Group, a New Jersey-based outsourcing company that handles mail room tasks for businesses. Five weeks ago, he transferred from hard-on-the wallet Manhattan to Tampa with his salary unchanged.

The cost-of-living savings alone, he figures, probably translates to a 20 percent pay increase. Workers on fixed pay raises such as Vicki Farrell have a hard time relating to talk of wage increases.

A 26-year veteran with the city of Tampa who now works in the city water department, Farrell maxed out on what she could earn in merit increases two decades ago and now can only receive the standard 3 percent annual raise.

Her solace: "My friend works for the county and apparently the city gets better raises than the county," she said.

- Information from Times wires were used in this report.

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