Growth Slows As Wages Rise; Stocks Slump on New Fears Of Inflation, Rate Increase
Economic growth slowed significantly in the second quarter while wages increased at the fastest pace since the early 1990s, the government reported yesterday. The news led to a sell-off on Wall Street as investors feared the Federal Reserve was more likely to raise interest rates again.</br></br>At first glance, the slowing in the annual rate of growth in gross domestic product from its 4.3 percent clip in the first three months to 2.3 percent in the spring appeared to be a development that would satisfy Federal Reserve Chairman Alan Greenspan, who has been counting on a chilling of the economy to forestall the need for any further increases in interest rates.</br></br>But financial markets passed over that possibility and instead focused on a 1.1 percent increase in the employment cost index (ECI), a broad measure of wages and benefits. The index rose at a rate greater than the 0.8 percent analysts had expected--and raised the specter of inflationary pressures increasing in an economy that already is experiencing the tightest labor market in decades.</br></br>The Dow Jones industrial average fell 180.78 points, to 10,791.29, as investors worried that the markets' benign environment of strong economic growth and weak inflation was undergoing a sea change. The technology-dominated Nasdaq composite index slumped 65.83, to 2640.01, and the Standard and Poor's 500-stock index tumbled 24.37, to 1341.03.</br></br>The bond market also soured on the news, with the price of the benchmark 30-year Treasury bond falling $7.81 per $1,000 in face value and the yield rising to 6.07 percent, from 6.00 percent on Wednesday.