WASHINGTON (Reuters) – U.S. unit labor costs were much weaker than initially thought, declining both in the second and third quarters of this year, pointing to very benign inflation pressures in the near term even as the labor market is close to full employment.
Other data on Wednesday showed private-sector employment increasing at a solid clip in November, with the manufacturing sector adding the most jobs in at least 15 years.
The signs of soft wage growth and tightening labor market conditions could further intensify inflation debate at the Federal Reserve’s policy meeting next week. Economists, however, believe that wage growth is being understated.
“The weakness in unit labor costs will undoubtedly be cited by many as evidence that worries about the economy overheating due to a tightening labor market are misplaced,” said Jim O‘Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.
“But we believe that the official wage income data being used for calculations have been distorted recently by income reporting being delayed in anticipation of tax cuts, and Commerce Department analysts may be misinterpreting information from quarterly tax records.”
The Labor Department said unit labor costs, the price of labor per single unit of output, dropped at a 0.2 percent annualized rate in the last quarter instead of rising at a 0.5 percent pace as reported last month.
That followed a 1.2 percent rate of decline in the second quarter, which was previously reported as a 0.3 percent pace of increase. It was the first time since 2014 that unit labor costs recorded two straight quarterly declines.
The downward revisions would suggest that inflation could struggle to rise toward the Fed’s 2 percent target. The U.S. central bank’s preferred inflation measure is currently at 1.4 percent and has been below the Fed’s target for nearly 5-1/2 years.
COMPENSATION REVISED DOWN
Prices for U.S. Treasuries were trading higher and the dollar rose marginally against a basket of currencies. Stocks on Wall Street were little changed in volatile trade.
“Low unit labor cost growth keeps a lid on consumer inflation, but should be a boon for corporate profitability,” said Scott Anderson, chief economist at Bank of the West in San Francisco.
Compared to the third quarter of 2016, unit labor costs declined at a 0.7 percent rate. The increase in average hourly compensation was revised to down to a 2.7 percent rate from the previously reported 3.5 percent rate in the third quarter.
Separately, the ADP National Employment Report showed private employers added 190,000 jobs last month, though this was down from 235,000 jobs in October. The report is jointly developed with Moody’s Analytics.
Services-sector employment gains led the advance, with the largest increase coming in education and health services at 54,000, followed by professional and business services at 47,000. Manufacturing payrolls increased by 40,000 jobs, the most in the ADP series history dating back more than 15 years, while construction shed 4,000.
“The job market is red hot, with broad-based job gains across industries and company sizes. The only soft spots are in industries being disrupted by technology, brick-and-mortar retailing being the best example,” Mark Zandi, chief economist of Moody’s Analytics, said in a statement. “There is a mounting threat that the job market will overheat next year.”
The ADP figures come ahead of the U.S. Labor Department’s more comprehensive non-farm payrolls report on Friday, which includes both public- and private-sector employment.
Economists polled by Reuters expect the government report to show U.S. private payroll employment grew by 190,000 jobs in November, down from 252,000 the month before. Total non-farm employment is forecast to have risen by 200,000.