WASHINGTON - Wage and benefit cost pressures may start creeping up in the months ahead if the economy continues to expand smartly and businesses find themselves taking on more workers, analysts said.
While the latest readings on employer compensation costs continue to improve, these analysts are saying bond market worries about an upturn in inflation remain justified.
Their comments came after the Labor Department reported Tuesday that the employment cost index for the first three months of the year increased 0.9%. The March level for the index was up only 3.2% compared to a year earlier as costs paid by private business for wages and benefits continued to decelerate.
The report drew a positive reaction in the bond market until a later report on consumer confidence from the Conference Board turned out to be stronger than expected. The index for April issued by the New York-based business research organization climbed to 91.7 from 86.7, continuing a rise from a low of 60.5 last October. The index is based on a 1985 U.S. average equal to 100.
Fabian Linden, executive director of the board's consumer research center, said the April index level showed that buyers "continue to be optimistic" and signaled, "a strong economy."
The two reports highlighted the conflicting pressures on the bond market, with official measures of inflation remaining mild while other evidence points to continued economic momentum, which Federal Reserve officials are seeking to slow.
Richard Peterson, chief economist for Continental Bank in Chicago, called the Labor Department figures significant because they show "the costs of employment are being, brought down," especially costs for health care and other benefits. "This sort of indicates that a structural change is underway in the work place," he said.
Benefit costs rose only 0.9% during the first quarter, not much more than the 0.7% gain for the wages and salaries. For civilian workers, total benefit costs rose 4.1% in the 12-month period ending in March, down from 4.6% in December 1993, and 5.4% in March a year earlier.
The slowdown in benefit costs reflects efforts by businesses to pare expenses and pass on additional expenses to employees, Peterson said.
But other economists were pessimistic about the long-term outlook for labor markets and said they expect wage pressures to build. In a classic recovery, as businesses step up hiring to meet customer demand, they take on less experienced workers who slow gains in productivity. That means rising unit labor costs, a trend that could be reinforced if higher interest rates trim business capital spending to become more efficient.
Peter Skeperdas, an economist with Griggs & Santow Inc., said he has been impressed with the steady monthly increases in consumer credit reported by the Fed. "People are borrowing and feeling good about their balance sheet," he said. Consumers also appear to be stepping up their purchases with the cash generated from the wave of home mortgage refinancings that swept through households in the last year, he said.
"People who keep bringing up the wage data are bringing out a pretty tired actor on stage," said Gary Ciminero, chief economist for Fleet Financial Group, in Providence, R.I. Annual wage increases will not stay below inflation as businesses keep adding to monthly payrolls, said Ciminero, who expects the April employment report "to be one hell of a pop."