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Salaries and home prices to rise slowly

Cooling homes

The government is predicting that U.S. housing prices may follow the same path as salary increases (see "Slower hikes" below), growing at their slowest pace since 1970 over the next few years.

Researchers at the Federal Reserve say that if interest rates rise, existing home prices may increase a cumulative of just 2.6 percent over the next three years. That would mark the lowest rate since the government began keeping records in 1970.

But it's a conclusion that's not shared by everyone. The National Association of Realtors predicts 15 percent growth over the next three years, while some economists say low interest rates have created a "bubble" in the market. They expect a fall in prices that could destabilize the economy.

But Fed Chairman Alan Greenspan believes that is unlikely. Mr. Greenspan and other officials believe the rise of housing prices is bound to slow as interest rates climb, but they don't expect anything drastic to occur.

"Some factors, including increasing prosperity and wealth associated in part with rapid gains in labor productivity and earning power, should help support house prices," said Fed Governor Donald Kohn.

Slower hikes

If you're hoping a stronger bottom line for your company will pay off in a bigger salary increase this year, you may be disappointed.

A recent survey by Mercer Human Resources Consulting found that most employers plan to award average increases near 3.5 percent this year and next. That's significantly lower than the 4 to 5 percent increases given in the 1990s.

That dynamic is unlikely to change much in the next few years, concludes the Mercer survey and another issued last month by the Conference Board. "Companies are being very cautious about incurring fixed expenses," said Charles Peck, compensation specialist with the Conference Board.

Although business conditions have improved, the labor market still favors companies. That's why employers are wary of taking on larger permanent costs associated with salary increases. Instead, many companies plan to reward workers with one-time bonuses.

Still, the modest raises likely will keep workers' pay ahead of the rate of inflation, and planned wage freezes are much less prevalent across most sectors. Only 5 percent of companies are freezing pay for at least some of their workers this year, down from 12 percent last year and 16 percent in 2002, the Mercer survey found.

Balance Sheet

  • Dell Inc. founder and chairman Michael Dell formally handed over the chief executive job to president Kevin Rollins. Mr. Dell, who started the company in 1984 while a student at the University of Texas, plans to spend more time talking to customers and working on new product development.
  • America's trade deficit narrowed to $46 billion in May, as U.S. exports posted their best month on record. The decline was the first after five straight months of deficit increases, which had become a presidential campaign issue for Democratic candidate John Kerry.
  • Although food and energy prices increased again in June, the Labor Department's Consumer Price Index rose just 0.3 percent last month, down considerably from a 0.6 percent spike in May. The smaller price increase supports the Federal Reserve strategy to boost interest rates gradually, rather than take more aggressive action to keep inflation at bay.
  • A blockbuster deal between Harrah's Entertainment Inc. and casino rival Caesars Entertainment Inc. calls for Harrah's to pay Caesars' stockholders either $17.75 a share in cash or 1/3 share of Harrah's stock per share. The estimated $5.2 billion deal is subject to regulatory approval and eclipses last month's $4.8 billion MGM Mirage merger with Mandalay Resort Group.