Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

Weak US third-quarter unit labor costs point to slowing inflation

Published Dec 06, 2023 09:00AM ET Updated Dec 06, 2023 01:21PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Workers guide steel beams into place at a construction site in San Francisco, California September 1, 2011. REUTERS/Robert Galbraith/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. unit labor costs were much weaker than initially thought in the third quarter amid robust worker productivity, providing a boost to the Federal Reserve's fight against inflation.

The inflation outlook was further brightened by other data on Wednesday showing a moderation in wage growth in November. The reports followed news on Tuesday that job openings dropped to a more than 2-1/2-year low in October.

They strengthened financial market expectations that the U.S. central bank was done tightening monetary policy and could pivot to cutting rates as early as the first quarter of 2024.

"The decline in labor costs points to a further slowdown in services inflation, the last front in the Fed's effort to bring inflation back to 2%," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York. "Our baseline forecast assumes that rate cuts don't start until the third quarter of next year, although the risk may be growing that the Fed starts sooner."

Unit labor costs - the price of labor per single unit of output - fell at a 1.2% annualized rate in the third quarter, the Labor Department's Bureau of Labor Statistics (BLS) said, revised down from the previously reported 0.8% pace of decline. That was the first drop since the fourth quarter of 2022.

Economists polled by Reuters had expected that the decrease in unit labor costs would be revised down to a 0.9% rate.

Growth in unit labor costs was lowered to a 2.6% rate in the second quarter from the previously reported 3.2% pace. Unit labor costs rose at a 1.6% rate from a year ago in the third quarter, the smallest year-on-year increase since the second quarter of 2021.

The moderate growth in annual labor costs bodes well for the Fed's efforts to lower inflation to its 2% target. It is expected to leave interest rates unchanged next Wednesday. The Fed has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range, since March 2022.

Nonfarm productivity, which measures hourly output per worker, increased at a 5.2% rate last quarter. That was the fastest pace since the third quarter of 2020 and was revised up from the previously reported 4.7% rate.

The upgrade was telegraphed last week by revisions to gross domestic product data, which showed the economy growing at a 5.2% rate in the July-September quarter, instead of the previously reported 4.9% pace.

Productivity grew at an unrevised 3.6% pace in the second quarter. It expanded at a 2.4% pace from a year ago in the third quarter, revised up from the previously estimated 2.2% rate.

With economic growth appearing to have significantly slowed down at the start of the fourth quarter, the brisk pace of productivity growth is unlikely to be sustained.

A separate report from the Commerce Department's Census Bureau showed the trade deficit widening 5.1% to $64.3 billion in October as exports declined, suggesting that trade could subtract from GDP growth this quarter.

"There are good reasons to believe this is a pro-cyclical acceleration in productivity growth rather than a catch-up story as productivity is now accelerating above the 2007-2019 trend," said Gregory Daco, chief economist at EY-Parthenon in New York. "Still, we see limited upside for productivity growth as economic activity is expected to downshift."

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

WAGE GROWTH COOLING

Hourly compensation rose at an unrevised 3.9% pace last quarter, but increased at a downwardly revised 4.0% rate from a year ago. Annual compensation was previously reported to have risen at a 4.2% rate.

Slowing wage pressures were underscored by the ADP National Employment Report, which showed pay increases for workers remaining in their jobs at 5.6% year-on-year in November, the smallest gain since September 2021. Wages for people changing jobs rose 8.3%, the smallest year-on-year increase since June 2021.

The ADP report also showed private payrolls increased by 103,000 jobs last month after rising 106,000 in October.

The ADP report, jointly developed with the Stanford Digital Economy Lab, was published ahead of the release on Friday of the BLS' more comprehensive and closely watched employment report.

The labor market is steadily cooling in the aftermath of the hefty rate hikes. According to a Reuters survey of economists, the employment report is expected to show private payrolls increased by 153,000 jobs in November as about 33,000 striking United Auto Workers union members returned to work.

Private payrolls rose 99,000 in October. Total nonfarm payrolls are estimated to have increased by 180,000 in November after rising 150,000 in the prior month.

"The softer turn of recent labor market releases reduces the risk that inflation pressures revive due to wage-price issues, making it easier for the Fed to pivot to rate cuts in 2024," said Bill Adams, chief economist at Comerica (NYSE:CMA) Bank in Dallas.

Weak US third-quarter unit labor costs point to slowing inflation
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email