Wall Street rallied for a second straight session Tuesday after easing wage pressures and stronger-than-expected service sector activity raised prospects that the economy could cool gradually and leave room for the Federal Reserve to lower interest rates next year.

Investors applauded Labor Department figures showing wages and benefits increased at a much slower pace in the third quarter than had been estimated. Recent concerns about inflation had eroded some hopes that the Federal Reserve would start lowering interest rates next year. The central bank has said inflation remains its primary concern.

Meanwhile, the Institute for Supply Management, a trade group, found activity in the nation's services sector rose at a faster rate in November, giving a further boost to investor sentiment. An index reading of 58.9 was above the 55.5 that had been expected and the 57.1 seen in October.

"Certainly that ISM number was a nice surprise to the upside but for me the numbers that were more important were the unit labor costs and the productivity number" from the Labor Department, said Scott Wren, senior equity strategist for A.G. Edwards & Sons. "You're not getting as big a kicker off this data as you might have six month ago because the market is pretty fairly valued."

The Dow Jones industrial average rose 47.75, or 0.39 percent, to 12,331.60. A 2.5 percent increase from Coca-Cola Co. and a 2.3 percent rise from Walt Disney Co. helped the blue chip average.

Broader stock indicators also rose. The Standard & Poor's 500 index gained 5.64, or 0.40 percent, to 1,414.76. The index hit a six-year high of 1,415.27. The Nasdaq composite index was up 3.99, or 0.16 percent, at 2,452.38.

The Russell 2000 index of smaller companies climbed 1.57, or 0.20 percent, to a new closing high of 797.42. The index also passed the 800 mark for the first time Tuesday, moving as high as 801.01.

Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.45 percent from 4.43 percent from late Monday. The dollar firmed against other major currencies, while gold prices fell.

Light, sweet crude settled down 1 cent at $62.43 a barrel on the New York Mercantile Exchange.

The Labor Department report found costs of wages and benefits per unit of output increased at the annual rate of 2.3 percent in the third quarter, a hefty drop from the 3.8 percent rate the agency reported a month ago. Also, growth in worker productivity slowed to an annual rate of 0.2 percent, though the increase still topped an earlier estimate that had productivity as unchanged.

"I think more and more we've seen inflation start to roll over," Wren said, noting many investors have been concerned recently that growth would slow too quickly. He believes investors should remain cautious. "It is a little worrisome that more people aren't calling for a recession out there because I hate to see when everyone is thinking the same way."

Wren's call for vigilance comes on the 10th anniversary of remarks by former Federal Reserve Chairman Alan Greenspan in which he famously asked how investors were to know when "irrational exuberance" had unduly escalated asset values.

Christopher Piros, director of investment strategy and portfolio management for Prudential Investments, contends valuations are "still quite reasonable" and notes that earnings have held up well. However, he believes many investors are downplaying the risk of a pronounced economic slowing.

"I don't see a recession coming but I think there is some risk that the slowdown is deeper than some investors have factored in."

Wall Street has been trying to determine what effect a slowing housing market could have on consumer spending. Comments from Toll Brothers Inc. provided some reassurance. The luxury homebuilder advanced 96 cents, or 3 percent, to $32.87 despite posting a sharp drop in profits. It said it sees some signs of stabilization in the housing sector and raised its forecast for first-quarter home deliveries.

In other corporate news, Coca-Cola rose $1.17 to $48 after winning praise from several analysts, while bullish comments from Disney sent the stock to close up 76 cents at a five-year high of $34.20.

Direct General Corp., an insurance holding company, surged $3.99, or 24.2 percent, to $20.50 after agreeing to be acquired by a private equity group for about $432.4 million.

Kroger Co. rose $1.16, or 5.2 percent, to $23.49 after the supermarket chain posted a 16 percent increase in its third-quarter profit. The company also said earnings per share for the year would grow 8 percent to 10 percent, rather than 6 percent to 8 percent as it had forecast.

Cooper Tire & Rubber Co. rose $1.12, or 8.4 percent, to $14.46 after a Deutsche Bank analyst upgraded the stock, citing expectations of cost-cutting and an improving industry.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where consolidated volume came to 2.79 billion shares, compared with 2.75 billion traded Monday.

Overseas, Japan's Nikkei stock average closed down 0.23 percent. Britain's FTSE 100 closed up 0.60 percent, Germany's DAX index rose 1.23 percent, and France's CAC-40 was up 1.20 percent.