Fed increases interest rates to 6% - will wages respond?
Alan Greenspan of the Federal Reserve Board stepped up his attempts to cool the U.S. economy on May 16th. By increasing interest rates by one-half point to 6%, he has adopted a more aggressive policy, based on new evidence from the Bureau of Labor Statistics (BLS), and on warnings from economists that a wage-price spiral could be brewing.
What the statistics say
The Fed''s earlier quarter point increases, five of them since June 1999, have not been enough to slow down the unprecedented, record-length expansion of the U.S. economy.
The April Consumer Price Index for All Urban Consumers (CPI-U) was released on May 16th. Though the index was unchanged from March''s figure, the seasonally adjusted annual CPI-U increase now stands at 3.0%. This was welcome news, but not enough apparently to offset the other evidence that the economy is steaming ahead. Consumer spending has been growing at its highest rate in 17 years, reaching an annual rate of 8.3% in 1Q2000. April''s unemployment rate was 3.9%, the lowest in 30 years.
Higher earnings continue across the economy
Average hourly earnings have risen by 3.8% and average weekly earnings by 4.4% annually since April 1999. Wooing the Worker, an article Business Week (May 22) floats the idea that "many economists" expect wage gains may hit 5% in 2000. The article quotes James O''Sullivan, an economist at Morgan Guaranty Trust Co. who says, "it looks like wage inflation is here".
Negotiated wages
2000 is a light bargaining year and for collectively bargained wages, no alarm bells are ringing yet. Data released by BNA on May 18 shows the median 1st year gain for newly-negotiated agreements was 3% for the first 20 weeks of 2000, the same as in 1999. A closer look at the data shows higher levels when lump-sum payments are factored in: for manufacturing, 3.2% median increase, and for all settlements, 3.4%. Still, these figures are up only slightly from 3% in each category in 1999.
Major negotiations still to come in the second half of 2000:
ü June 25th contract expiry between General Electric & the Coordinated Bargaining Committee representing its 14 unions;
ü Bell Atlantic and the CWA and IBEW (nearly 90,000 workers) face an August contract expiry;
ü USWA and Rubber Industry negotiations continue at Bridgestone/Firestone and Goodyear;
ü The U.S. Postal Service and two unions representing 400,000 workers expire in late 2000
ü Construction agreements will expire across the country, particularly in the Pacific Northwest.