Strong worker productivity in the third quarter contributed to considerably lower US unit labor expenses than previously anticipated, supporting the Federal Reserve's efforts to combat inflation.
Other data released on Wednesday indicated that wage increases in November had moderated, which further brightened the outlook for inflation. According to figures on Tuesday, job openings fell to a level below two and a half years in October.
They enhanced expectations in the financial markets that the United States Federal Reserve would stop tightening its monetary policy and may start lowering interest rates as soon as the first quarter of next year.
Nancy Vanden Houten, chief US economist of Oxford Economics in New York, said that the decrease in labor costs indicates a further decline in services inflation, the final front in the Fed's attempt to return inflation to 2%. The Fed may decide to initiate rate cuts earlier than anticipated, but their baseline prediction is that the cuts won't occur until the third quarter of 2024.
The cost of labor for each individual unit of production, or unit labor costs, decreased at an annualized rate of 1.2% in the third quarter, according to the Labor Department's Bureau of Labor Statistics. This is a revision from the earlier reported decline pace of 0.8%. Since the last quarter of 2022, this was the first decline.
Unit labor cost growth was revised down from the originally reported 3.2% rate to 2.6% in the second quarter. The third quarter saw the lowest year-over-year increase in unit labor costs since the second quarter of 2021, rising at a rate of 1.6% from the previous year.
The Fed's attempts to bring inflation down to its target of 2% are encouraged by the labor costs' moderate annual growth. Interest rates are anticipated to remain unchanged on Wednesday of next week. From March 2022 to the present, the Fed has increased its benchmark overnight interest rate by 525 basis points to the present 5.25%-5.50% level.
The previous quarter saw a 5.2% increase in nonfarm productivity, which is calculated as the hourly output per worker. It had been revised up from the initially reported rate of 4.7%, and that marked the quickest pace since the third quarter of 2020.
The upgrade was hinted by last week's revisions to the country's gross domestic product figures, which revealed that the economy grew at a 5.2% annual rate during the July–September quarter rather than the previously stated 4.9% rate.
In the second quarter, productivity increased at an unrevised rate of 3.6%. The third quarter growth rate was revised up from the initial estimate of 2.2% to 2.4% from a year earlier.
It is unlikely that the rapid rate of productivity growth will continue, given that economic growth appears to have considerably slowed down at the beginning of the fourth quarter.
The trade deficit increased 5.1% to $64.3 billion in October as exports decreased, according to another report from the Census Bureau of the Commerce Department. This suggests that trade may have a negative impact on GDP growth this quarter.
Pay growth cooling
Hourly compensation increased at an unrevised 3.9% rate in the previous quarter, but it rose at a downwardly revised rate of 4.0% from the previous year. It was previously reported that annual compensation increased at a rate of 4.2%.
The ADP National Employment Report showing salary increases for workers staying in their jobs at 5.6% year-over-year in November — the weakest gain since September 2021 — indicated decreasing wage pressures. The pay increase for individuals who changed jobs was 8.3%, the lowest annual growth since June 2021.
The ADP report also revealed that after increasing by 106,000 jobs in October, private payrolls rose by 103,000 last month.
The report, which was co-authored with the Stanford Digital Economy Lab, was released ahead of the more thorough and closely followed employment report from the Bureau of Labor Statistics, which will be released on Friday.
Following the significant rate increases, the labor market is gradually cooling. A poll of economists predicts that the employment report is going to show that, in November, private payrolls grew by 153,000 jobs as around 33,000 protesting United Auto Workers union members went back to work.
October saw a 99,000 increase in private payrolls. November's total nonfarm payrolls are projected to have grown by 180,000, following a 150,000 increase in the previous month.
According to Bill Adams, the chief economist of Comerica Bank in Dallas, the recent labor market releases have softened, which lowers the chance that wage-price issues will resurrect inflationary pressures and facilitates the Fed's decision to pivot to rate cuts in 2024.