Wage rise reignites inflation concerns

NEW YORK » Wall Street closed sharply lower yesterday after a series of economic reports left investors questioning whether the Federal Reserve might resume its string of interest rate hikes when it meets later this month.

A Labor Department report that wages rose at an annual rate of 4.9 percent in the second quarter, above the 4.2 percent the agency estimated, was an unpleasant surprise for a market that had reached three-month highs on hopes of stable rates. For the first quarter, the department said labor costs jumped 9 percent -- the largest quarterly rise in almost six years.

The market also found little solace in a report from the Institute for Supply Management that showed the services sector grew at a faster pace in August than economists forecast. An economy still showing this type of growth could make it easier for the Fed to justify a rate hike to fight inflation. The central bank left rates unchanged at its last meeting after a string of 17 straight increases; its next meeting is Sept. 20.

Stocks drifted even lower yesterday afternoon after release of the Fed's "beige book," which found that while economic growth continued in the fall, five of the Fed's 12 districts showed deceleration. The findings that the housing market slowed could also bolster the arguments of some that the economy at large could eventually suffer if consumer spending cools as a result.

One of the market's greatest fears is that although the economy might continue to slow, the Fed will resume its course of rate hikes as it seeks above all to forestall inflation.

The Dow Jones industrial average fell 63.08, or 0.55 percent, to 11,406.20.

The tech-heavy Nasdaq composite index and the Standard & Poor's 500 index showed steeper declines. The Nasdaq dropped 37.86, or 1.72 percent, to 2,167.84, in part as Intel Corp. declined following a widely expected announcement of job cuts.

The S&P 500 was down 12.99, or 0.99 percent, at 1,300.26, while the Russell 2000 index of smaller companies fell 15.46, or 2.13 percent, to 712.04.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where preliminary consolidated volume came to 2.36 billion shares, compared with 2.13 billion shares Tuesday.

"I think people are still looking over their shoulders in terms of labor costs," said Jon Brorson, head of growth equities at Neuberger Berman in Chicago.