U.S. labor cost growth smallest in a year

  • The employment cost index rose 1.0% in the fourth quarter
  • Wages, wages up 1.0%; increased 5.1% year on year
  • The consumer confidence index fell to 107.1 in January
  • House price inflation slowed in November

WASHINGTON, Jan 31 (Reuters) – U.S. labor costs rose at their slowest pace in a year in the fourth quarter as wage growth slowed, giving the Federal Reserve a boost in its fight against inflation.

There was more encouraging news on inflation, with other data on Tuesday showing house price growth slowed significantly in November. The report was published as Fed officials began a two-day policy meeting. The US central bank is expected to raise its policy rate by 25 basis points on Wednesday, further reducing the pace of its interest rate hikes.

“The Fed’s rate hikes in 2022 succeeded in cooling an overheated economy,” said Bill Adams, chief economist at Comerica Bank in Dallas. “But policymakers want to see a wider slack margin open to be confident that slower inflation in late 2022 becomes the trend.”

The Employment Cost Index, the broadest measure of labor costs, rose 1.0% last quarter, the Labor Department said. That was the smallest advance since the fourth quarter of 2021 and followed a 1.2% rise in the July-September period.

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Economists polled by Reuters had forecast the ECI to rise 1.1%. Labor costs rose 5.1% on a year-over-year basis after rising 5.0% in the third quarter. They remain higher than the 3.5% that Fed officials and economists see as consistent with weak inflation. The Fed has an inflation target of 2%.

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The ECI is seen by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for changes in the composition and quality of employment.

The Fed last year raised its policy rate by 425 basis points from near zero to a range of 4.25%-4.50%, the highest since late 2007. Although the central bank has moved to smaller rate hikes, it is unlikely to stop tightening monetary policy.

The Fed’s “Beige Book” report this month described the labor market as “persistently tight,” noting that “wage pressures remained high across the board” in early January, although five “regional Reserve Banks reported that these pressures have eased somewhat.”

Although annual growth in average hourly earnings in the Labor Department’s monthly employment report has slowed, wages remain high. The Atlanta Fed’s wage tracker also moderated, but remained elevated in the fourth quarter.

The tight labor market was underscored by a separate Conference Board report that showed its consumer survey of the so-called labor market gap, which is derived from data on respondents’ views on whether jobs are plentiful or hard to come by, rose to 36.9 in January from 34.5 in December.

This measure is closely related to the unemployment rate from the Labor Department, and the increase is consistent with tight labor market conditions. The government on Wednesday will publish job opening data for December. There were 10.5 million job openings on the last business day of November.

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Stocks on Wall Street are trading higher. The dollar fell against a basket of currencies. US Treasury prices were mixed.


“Easing labor cost growth should not be conflated with benign labor cost growth,” said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina. “The labor market remains very tight. While the decline in labor costs is a welcome development, it is too early to declare that it will remain there for the long term.”

Wages and salaries rose 1.0% in the last quarter, also the smallest gain since the fourth quarter of 2021, after rising 1.3% in the third quarter. They rose 5.1% on a year-over-year basis after rising by the same margin in the previous quarter.

Private sector wages rose 1.0%, slowing from a 1.2% rise in the third quarter. Private industry wages rose 5.1% on a year-on-year basis after rising 5.2% in the July-September quarter.

The moderation in wage growth was more pronounced in the leisure and hospitality sector, where wages and salaries rose 0.9% after rising 1.8% in the third quarter. Employment in this industry remains below pre-pandemic levels.

But wages in the financial activity industry rose as did wholesale trade. Construction wages increased strongly.

State and local government wages rose 1.0% last quarter after jumping 2.1% in the third quarter.

Higher inflation, however, continues to affect consumer purchasing power. Inflation-adjusted wages for all workers fell 1.2% on a year-over-year basis in the fourth quarter.

Interest rose 0.8% last quarter after rising 1.0% in the third quarter. They are up 4.9% on a year-over-year basis.

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The Fed’s rate hike cycle, the fastest since the 1980s, dampened home price inflation. The S&P CoreLogic Case-Shiller national home price index, covering all nine US census divisions, rose 7.7% on a year-over-year basis in November, retreating from a 9.2% rise in October.

House prices as measured by the Federal Housing Finance Agency rose 8.2% in the 12 months to November after rising 9.8% in October. A continued shortage of homes for sale, however, is likely to prevent a sharp decline in home prices.

“Lack of inventory, no forced sales and a pullback in mortgage rates helped stem the decline,” said Robert Kavcic, senior economist at BMO Capital Markets in Toronto.

Despite consumers’ upbeat outlook on the labor market, they remain gripped by fears of a recession in the next six months, with many taking a wait-and-see approach to big-ticket purchases. The Conference Board’s consumer confidence index fell to 107.1 this month from 109.0 in December.

Consumers’ 12-month inflation expectations rose to 6.8% from 6.6% last month.

“We project that a moderate recession will occur by the middle of the year, although the downside to this recession should be limited by the strong financial fundamentals for most households and businesses,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.

(This story has been corrected to change the Case-Shiller home price increase to 7.7%, instead of 9.2%, in paragraph 22)

Report by Lucia Mutikani; Editing by Andrew Heavens, Paul Simao and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.


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