US Q2 labor costs gain smallest in 1-1/2 years

WASHINGTON: US labor costs rose at their slowest pace in 1-1/2 years in the second quarter, the latest indication of benign inflation that could allow the Federal Reserve to cut interest rates yesterday for the first time in a decade. The Employment Cost Index, the broadest measure of labor costs, increased 0.6 percent, the smallest gain since the fourth quarter of 2017, the Labor Department said yesterday. The ECI had increased 0.7 percent for two straight quarters.

In the 12 months through June, the ECI rose 2.7 percent, slowing from a 2.8 percent increase in the year through March. Economists polled by Reuters had forecast the ECI would rise 0.7 percent in the April-June period.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack. It is also considered a better predictor of core inflation. Labor costs picked up over 2018 as a tightening labor market pushed up wage growth. The pace of increases has since moderated somewhat. The report came on the heels of data on Tuesday showing a key measure of inflation increased 1.6 percent in the 12 months to June, continuing a pattern of slow gains that have seen it undershoot the Fed’s 2 percent target this year.

Tame inflation and slowing economic growth are expected to encourage US central bank officials to cut rates when they conclude a two-day policy meeting later yesterday. The economy, which is cooling as the boost from last year’s $1.5 trillion tax cut package fades, is facing headwinds from a bitter trade war between the United States and China, slowing global growth and Britain’s potential disorderly departure from the European Union. Prices of US Treasuries were trading slightly higher on Wednesday while the dollar was

largely unchanged against a basket of currencies as traders awaited the Fed’s decision on rates. US stock index futures were up.

Job gains

In the second quarter, wages and salaries, which account for 70 percent of employment costs, rose 0.7 percent after rising by the same margin in the prior period. Wages and salaries were up 2.9 percent in the 12 months through June, matching the gain in the year through March. Private sector wages and salaries rose 0.6 percent in the second quarter after increasing 0.7 percent in the first quarter. They were up 3.0 percent in the 12 months through June after rising by the same margin in the year through March. State and local government wages and salaries rose 0.5 percent after advancing 0.6 percent in the first quarter. Benefits for all workers rose 0.5 percent in the April-June quarter, slowing from the first quarter’s 0.7 percent rise. The moderation reflected a 0.4 percent decline in benefits in the natural resources, construction and maintenance industry.

Benefits in the manufacturing industry rose only 0.5 percent after surging 0.9 percent in the first quarter. Overall, benefits were up 2.3 percent in the 12 months through June, the smallest gain since March 2017, after rising 2.6 percent in the year through March.

Separately yesterday, the ADP National Employment Report showed private payrolls increased by 156,000 jobs in July after rising 112,000 in June. The ADP report, which is jointly developed by Moody’s Analytics, has greatly understated the private payrolls component of the government’s employment report in each of the last two months.

Economists polled by Reuters are looking for nonfarm employment to have increased by 162,000 jobs in July after surging by 224,000 in June. Job gains averaged 172,000 per month in the first half of this year, below the 223,000 monthly average in 2018.

The pace of job gains, however, remains above the roughly 100,000 per month needed to keep up with growth in the working-age population. The unemployment rate is expected to have held steady at 3.7 percent in July. —Reuters