More Fears On Inflation Hit Stocks
"After rising almost uninterruptedly for three months, the stock market tumbled for a second day yesterday over fears that inflation is not settling down enough to satisfy the Federal Reserve.
With long-term interest rates for government bonds flirting with the 5 percent level and Fed officials raising louder alarms over inflation, investors who only a few days ago were still counting on the Fed to cut its key short-term rate later this year are now starting to worry that borrowing costs could go even higher if price pressures continue to build.
New Labor Department data for the first quarter showed yesterday that productivity gains were slower and labor costs rose three times faster than first calculated. While that was in part a statistical aberration because of stagnant growth during the winter, it was also seen as a sign that American businesses could be facing higher costs and lower profits down the road.
The labor cost numbers came as the White House released a new economic forecast that ratcheted up its estimate for inflation and predicted the job market would remain tight, with unemployment holding steady at 4.5 percent. The day before, Ben S. Bernanke, the Fed chairman, had indicated that he was still concerned that underlying inflation remained ''somewhat elevated.''
The cumulative effect was enough to make Tuesday and yesterday the worst two-day stretch on Wall Street since mid-March.
The Standard & Poor's 500-stock index fell 0.9 percent, closing at 1,517.38, while the Dow Jones industrial average gave up nearly 1 percent, falling 129.79 points to 13,465.67. The Nasdaq composite fell by a similar amount. Since Tuesday, the S.& P. 500 is down 1.4 percent; the Dow is off 1.5 percent.
I.B.M., Exxon Mobil, Cisco Systems and Pfizer led declines among major stocks, with all 10 industry groups in the S.& P. 500 taking hits.
Investors are starting to worry that they can no longer count on low interest rates to provide a benign environment for stocks.
''Already, core inflation has been running above the Fed's preferred range,'' said Dean M. Maki, chief United States economist of Barclays Capital, which has forecast two Fed rate increases before the end of the year. ''If wage pressures are intensifying as most recent data indicates they are, that is another reason to be concerned.''
Bond yields retreated slightly yesterday, but the yield on the 10-year Treasury note, the benchmark for longer-term interest rates, flirted again with 5 percent before closing at 4.96 percent. It has not closed above 5 percent since last summer.
Underscoring the Fed's concern about inflation, two central bank officials said in separate speeches yesterday that the rate of price increases was still running too hot to put them at ease.
Jeffrey M. Lacker, who voted as president of the Federal Reserve Bank of Richmond to raise interest rates last year while his colleagues on the Federal Open Market Committee decided to keep them steady, said: ''No statistically significant moderating trend has emerged yet.''
And Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, indicated that because inflation had not yet fallen as the Fed predicted it would, central bankers would remain on watch. ''We cannot afford to be complacent,'' she said.
The Labor Department report released yesterday -- part of a series that the Federal Reserve closely monitors for signs of inflation -- found that unit labor costs rose 1.8 percent in the first quarter. The fourth-quarter figures, which were larger because of year-end bonuses, were also revised up, to 8.9 percent, from an earlier estimate of 6.2 percent.
The report also showed that worker productivity grew less than first estimated, and at less than half the rate reported for the fourth quarter of last year. The output of the average American worker increased just 1 percent in the first quarter, compared with an earlier estimate of 1.7 percent.
Productivity growth had been growing relatively rapidly as the economy expanded. But with economic growth only 0.6 percent in the first quarter -- compared with 3.3 percent for all of last year -- productivity improvements have faltered.
Still, a number of economists said they expect that will change if growth, as expected, accelerates in the second half of the year.
''The bottom line is that productivity growth has slowed down in recent quarters, but has held up surprisingly well,'' Brian A. Bethune, an economist with Global Insight, said in a research note. ''An expected pickup in real growth in the second quarter and the second half of 2007 will deliver better productivity numbers.''
The White House economists lowered their estimate for growth to 2.3 percent from 2.9 percent, bringing it more in line with Wall Street's expectations. Edward P. Lazear, chairman of the Council of Economic Advisers, said that the slowdown in the first quarter caused the White House to lower its forecast for the year. But he said that the economy should regain momentum.
''We're actually expecting a pretty strong quarter right now,'' he said.
While stronger economic growth could keep inflation pressures bubbling, it also could help bolster stock prices. Indeed, a number of analysts said that they expected the market to recover quickly from its recent dip.
''Two days does not a trend make,'' said Michael P. Ryan, who runs wealth management research for UBS, adding that the S.& P. 500 and the Dow both reached record highs on Monday. ''There's a natural tendency for markets to pull back when that happens.''
THE MARKETS"