(Corrects to restore time period in 13th paragraph.)

June 2 (Bloomberg) -- For Federal Reserve officials considering what policy choice to make when they meet late this month, a key piece of worrisome inflation-related data disappeared yesterday in a flurry of revisions to productivity and cost figures.

This important change, along with other data clearly indicating that U.S. economic growth is slowing, leaves the door open for the Fed to keep its target for the overnight lending rate at the June 28-29 meeting at the current 5 percent.

At their May 10 meeting, minutes of which were released May 31, Fed officials expressed concern that inflation might be worsening. Financial markets reacted by raising their expectation of a rate increase at the next meeting.

That could happen, though the data don't point in that direction, and officials have said repeatedly that their decision is ``data dependent.''

According to the May minutes, officials noted that ``alternative measures of labor compensation provided divergent readings.'' After yesterday's revisions, there's no divergence.

A jump in unit labor costs at a 3 percent annual rate in the fourth quarter of last year at non-farm businesses turned into a decline at a 0.6 percent rate in the new figures from the Labor Department. Similarly, the first quarter's increase at a 2.5 percent rate was toned down to 1.6 percent.

Estimates of compensation increases for both quarters were lowered and the productivity gain for the first quarter was revised up. The changes left compensation only 2.8 percent higher than it was in March 2005 and unit labor costs up only 0.3 percent over the same 12 months -- hardly fuel for a sustained increase in inflation.

Inflation Front

Moreover, the 2.8 percent increase in compensation now exactly matches a change in the department's employment cost index for the period, a figure some economists had challenged as implausibly low.

So whatever is happening on the inflation front, pressure on businesses to raise prices because of higher labor costs isn't part of it.

That makes it more likely that Fed officials will continue to regard this spring's small bulge in core inflation as temporary if economic growth slows, as many of the policy makers have said they expect.

At the May 10 meeting, the members of the Federal Open Market Committee said that one reason they were more concerned about inflation was that ``the economy appeared to be operating at a relatively high level of resource utilization and had been growing quite strongly, and whether economic growth would moderate to a sustainable pace was not yet clear.''

It's clearer now.

Latest Data

Indeed, Macroeconomic Advisers, a forecasting firm, yesterday updated its growth forecast for this quarter to a 2.4 percent annual rate, less than half the 5.3 percent pace in the first three months of the year.

Today the Labor Department said the number of payroll jobs rose only 75,000 in May and revised down April's gain to 126,000 from 138,000. These figures, along with a drop last month in the total number of hours worked, provided powerful support for the argument that growth is slowing.

The Commerce Department reported May 26 that inflation- adjusted personal consumption spending rose only 0.1 percent for the second month in a row in April after months of much larger gains.

The Institute for Supply Management said yesterday that its index of activity in manufacturing dipped to 54.4 percent last month, its lowest level in nine months, from 57.3 percent in April.

`Loss of Momentum'

Norbert Ore, chairman of the ISM committee that produces the index, said slower growth within the factory sector ``is evidenced by a significant loss of momentum in the last four months as the new orders index has slipped from 61.9 percent in February to 53.7 percent in May.''

A reading of 50 percent indicates that manufacturing activity is neither expanding nor contracting.

Meanwhile, the University of Michigan reported that its consumer confidence index fell sharply last month to 79.1 from 87.4 in April. The May figure was the lowest in more than a decade except for the months close to the beginning of the Iraq war and those immediately following Hurricane Katrina last fall.

And the housing sector, after being exceptionally strong for several years, is slowly weakening.

Sales of both new and existing homes were down 5.7 percent in April from a year earlier, with the inventory of homes for sale in both categories up to roughly half a year's worth. Tellingly, median prices for both categories are hardly rising after long periods of double-digit rates of increase.

Right Conclusion

The officials understandably are concerned about inflation, which is running at or perhaps just a bit above the top of the range with which they are comfortable, as several FOMC members said at their May meeting, according to the minutes.

On the other hand, the officials also know that inflation typically peaks some months after economic growth slows. As the minutes said, ``It seemed most likely that, with modest further policy action, including a 25 basis point firming today, growth in activity would moderate gradually over coming quarters, pressures on resources would remain limited, and core inflation would stay close to levels experienced over the past year.''

So far there is no reason to think that conclusion is wrong.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: June 2, 2006 12:34 EDT