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Thursday, April 29, 1999 Published at 13:43 GMT 14:43 UK

Business: The Economy

US heads for golden scenario

US wage demands stay moderate ... as the economy booms

Wage growth in the United States is slowing down sharply, despite the booming economy.

The employment cost index (ECI) rose only 0.4% in the first quarter of 1999, compared with 0.7% in the first quarter of 1998.

[ image: Productivity is soaring, keeping costs down]
Productivity is soaring, keeping costs down
It was the smallest quarterly rise in the index in 17 years.

Economists had predicted a rise of double that figure, to 0.8%.

It indicates that the US economy is heading for a golden scenario, with high growth, low unemployment and low inflation.

"I think the really amazing thing is that we have the lowest unemployment rate in nearly 30 years yet we have the smallest quarter-to-quarter gain by the ECI on record, reminding us of just how well wage inflation has been contained despite an apparent tightening of the labour market," said John Lonski of Moody's Investors Service.

Boom continues

The news comes despite the booming US economy, which was growing at an annual rate of 6% at the end of 1998.

Wages are now growing at just half that rate, 3.0% on an annual basis, suggesting that strong productivity growth is continuing.

The first estimate for GDP in 1999 will be published on Friday, and most economists expect the economic boom to continue.

Some economists argue that the US economy has entered a new era, where massive company investment in computers and information technology has started to pay off, allowing the economy to grow faster than ever before, with no fear of inflation.

In support of the theory, they point to the slowdown in wage growth in the finance, real estate and insurance sector, which has benefited from such investment. Labour costs in this sector fell 0.7% in the first quarter of 1999, compared to a rise of 1.1% in the last quarter of 1998.

No inflation fears

The moderate rise in wages will be welcome news to the Federal Reserve, which has been worried that the US economy might overheat, causing inflation to rise.

That would have forced them to raise interest rates, which could have hit company profits and shares.

The bond market, which is very sensitive to fears of inflation, also soared on the news.

"Labour markets may be tight but they are not putting upward pressure on employment costs ... (it's) the most bullish report we've seen this year for the bond market," said Greg Jones, chief economist for

The rise in stock markets has indirectly helped labour costs, by reducing the cost of benefits like pensions to companies. Benefits, which also include health insurance, rose at an even slower rate than wages, by 0.3% in the first quarter of 1999.

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