Labor Report Spurs Rate-Hike Worries; Productivity Eases, Labor Costs Jump; Markets Eye Fed
U.S. productivity growth slowed and labor costs rose sharply in the second quarter, sparking new fears that the Federal Reserve may raise interest rates again next month.</br></br>Productivity at non-farm businesses rose at an annual rate of 0.6 percent and labor costs rose at an annual rate of 4.5 percent in the April-June period, according to revised estimates released yesterday by the Labor Department. The department earlier had estimated the productivity growth rate at 1.3 percent.</br></br>Stock and bond prices fell on the news, with the Dow Jones industrial average initially dropping more than 200 points. The Dow closed down 94.67 points to end at 10,843.21. Yields on 30-year U.S. Treasury bonds at yesterday's close rose to 6.13 percent, from 6.08 percent.</br></br>Strong productivity growth helps keep inflation low by allowing employers to boost wages and salaries without necessarily raising the prices paid by their customers. The second-quarter productivity number was down considerably from the 3.6 percent rate in the first quarter.</br></br>Investors apparently were concerned that faltering productivity growth could prompt the Fed to raise short-term rates, as it did at the end of June and again last month, to make sure inflation stays under control.