WASHINGTON – U.S. unit labor costs grew far less than initially thought in the third quarter, pointing to a still favorable inflation outlook even though price increases have not moderated much in recent months.
The Labor Department’s report on Tuesday also revealed that labor costs actually declined in the second quarter instead of rising, as estimated last month. Moderate labor costs growth is likely to be welcomed by Federal Reserve officials when they hold their last meeting of year next week.
The U.S. central bank is expected to cut interest rates by 25 basis points, the third reduction in borrowing costs since it started its monetary policy easing cycle in September.
“The labor market and wage growth are receding as a source of inflationary pressures,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
“The Fed has become less focused on the labor market as a source of inflationary pressures but likely still welcomes further signs of slowing wage growth, particularly since progress on other components of inflation has been even.”
Unit labor costs – the price of labor per single unit of output – increased at a 0.8% annualized rate last quarter, the Labor Department’s Bureau of Labor Statistics said.
Economists polled by Reuters had expected labor costs growth would be revised down to a 1.5% rate from the previously reported 1.9% pace in the July-September quarter.
That followed a downwardly revised 1.1% pace of decline in the second quarter. Labor costs were previously reported to have advanced at a 2.4% rate in the April-June quarter.
They increased at a 2.2% pace in the third quarter from a year ago, revised down from the previously reported 3.4% rate. The revisions reflected updated compensation data from the Bureau of Economic Analysis.
U.S. stocks were mixed. The dollar advanced against a basket of currencies. U.S. Treasury yields rose.
PRODUCTIVITY UNREVISED
A resilient economy, lack of progress in lowering inflation to the Fed’s 2% target, and concerns over President-elect Donald Trump’s proposed policies, including higher tariffs and mass deportations, have made the rate outlook for next year unclear. The Fed’s policy rate is now in the 4.50%-4.75% range.
Policymakers hiked the interest rate by 5.25 percentage points between March 2022 and July 2023. Data on Wednesday is likely to show the consumer price index increasing 0.3% in November after rising 0.2% for four straight months, a Reuters survey showed.
That would raise the year-on-year increase in consumer prices to 2.7% in November from 2.6% in October. Excluding the volatile food and energy components, the CPI was forecast to rise 0.3% for the fourth consecutive month, which would keep the annual increase in the so-called core CPI at 3.3%.
Compensation rose at a 3.1% rate last quarter, revised down from the previously reported 4.2% pace. It incorporated data from the BLS Quarterly Census of Employment and Wages (QCEW) for the second quarter. The BLS noted that normal updates to QCEW data “can lead to revisions and the most notable revisions in this release occurred in the manufacturing sectors.”
Nonfarm productivity, which measures hourly output per worker, increased at an unrevised 2.2% pace. Worker productivity grew at an unrevised 2.1% rate. It rose at an unrevised 2.0% rate from a year ago.
Productivity has expanded at a 1.8% pace during the current business cycle, which started in the fourth quarter of 2019. That compares to a 1.5% growth rate during the last business cycle, which ran from the fourth quarter of 2007 through the fourth quarter of 2019.
Some economists said the fairly strong pace of productivity through much of 2023 and most of this year raised questions about how restrictive monetary policy was at the moment.
“With productivity data like these in hand, the hawks at the Fed can argue that interest rates are closer to neutral than the committee previously believed,” said Christopher Rupkey, chief economist at FWDBONDS.
“The stronger productivity trend probably does not stop the Fed from cutting rates again next week, but the number of rate cuts needed in 2025 remains an open question.”
