U.S. third-quarter labor costs revised down; productivity weak

Business

WASHINGTON (Reuters) – Growth of U.S. labor costs was not as robust as initially thought in the third quarter, suggesting inflation could remain tame for a while.

FILE PHOTO: Work crews construct a new hotel complex on oceanfront property in Encinitas, California, U.S., November 26, 2019. REUTERS/Mike Blake

The sharp downward revision to labor costs, reported by the Labor Department on Tuesday, could also ease economists’ concerns about further pressure on corporate profits.

Unit labor costs, the price of labor per single unit of output, increased at a 2.5% annualized rate in the third quarter. They were previously reported to have advanced at a 3.6% rate. Compared with the third quarter of 2018, labor costs grew at a 2.2% rate, rather than the previously estimated 3.1%. Growth in hourly compensation was also revised lower, to a 2.3% rate in the third quarter, down from the originally reported 3.3% pace.

Hourly compensation rose at a 3.7% rate compared with the third quarter of 2018. Last quarter’s gains in unit labor costs and compensation are in line with other measures showing moderate wage gains, indicating inflation will probably continue to run below the Federal Reserve’s 2% target.

The U.S. central bank’s preferred inflation measure increased 1.6% in the 12 months through October, slowing from 1.7% in September. November data will be published later this month. Fed officials are scheduled to begin a two-day policy meeting on Tuesday. The central bank is not expected to cut interest rates on Wednesday after reducing borrowing costs in October for the third time this year.

The government reported last month that after-tax profits without inventory valuation and capital consumption adjustment, which corresponds to S&P 500 profits, decreased $11.3 billion, or at a rate of 0.6% in the third quarter. Profits were down at a rate of 0.4% compared with the third quarter of 2018.

U.S. financial markets were little moved by Tuesday’s revised data.

PRODUCTIVITY FALLS

The Commerce Department also confirmed that worker productivity fell by the most in nearly four years in the third quarter as a rebound in hours, driven by a surge in the volatile self-employed and unpaid family workers component, outpaced output in the third quarter.

Nonfarm productivity, which measures hourly output per worker, decreased at a 0.2% rate in the last quarter, the biggest drop since the fourth quarter of 2015. Productivity was previously reported to have decreased at a 0.3% pace in the July-September quarter.

Economists polled by Reuters had expected third-quarter productivity would be revised up to show it falling at a 0.1% rate. Productivity grew at an unrevised 2.5% rate in the second quarter. The government last month revised up third-quarter gross domestic product growth to a 2.1% rate from a 1.9% pace.

Compared with the third quarter of 2018, productivity increased at a 1.5% rate, instead of the previously reported 1.4% pace. Tepid productivity suggests the economy is unlikely to achieve the Trump administration’s goal of 3% annual growth.

Productivity increased at an average annual rate of 1.3% from 2007 to 2018, below its long-term rate of 2.1% from 1947 to 2018, indicating that the speed at which the economy can grow over a long period without igniting inflation has slowed.

Some economists blame soft productivity on a shortage of workers as well as the impact of rampant drug addiction in some parts of the country. Others also argue that low capital expenditure, which they say has resulted in a sharp drop in the capital-to-labor ratio, is holding down productivity.

There is also a belief that productivity is being inaccurately measured, especially on the information technology side. Fed Chairman Jerome Powell said in October the U.S. central bank was “carefully assessing the implications of possibly mismeasured productivity gains.”

Hours worked rose at a revised 2.5% rate last quarter. That was up from the 2.4% pace estimated in November.

Reporting by Lucia Mutikani; Editing by Paul Simao and Steve Orlofsky

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