US labor costs growth moderates in third quarter

By Lucia Mutikani

WASHINGTON, Dec 10 (Reuters) – U.S. labor costs increased slightly less than expected in the third quarter as a softening labor market curbed wage growth, which at face value bodes well for inflation.

The report from the Labor Department on Wednesday was, however, delayed by the 43-day government shutdown and the Bureau of Labor Statistics noted that “survey response rates decreased in September.” Data collection had not been completed before the longest shutdown in history, the BLS said. 

Federal Reserve officials are expected to cut the U.S. central bank’s benchmark overnight interest rate by another 25 basis points to the 3.50%-3.75% range at the end of a two-day meeting later on Wednesday out of concern for the labor market. 

The Fed has lowered borrowing costs twice this year. 

“The government shutdown affected the quality of the report so the results should be taken with a grain of salt and markets and Fed officials must wait for additional reports next year,” said Christopher Rupkey, chief economist at FWDBONDS. 

The Employment Cost Index (ECI), the broadest measure of labor costs, rose 0.8% in the last quarter, after gaining 0.9% in the second quarter, the BLS said. Economists polled by Reuters had forecast the ECI advancing 0.9%.

Labor costs increased 3.5% in the 12 months through September after rising 3.6% in the year through June.

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

While the moderation suggested wages posed no threat to inflation, price pressures remain elevated because of tariffs on imports, eroding consumers’ buying power. Cooler wage growth could also hamper consumer spending.

U.S. financial markets were little moved by the data as investors awaited the Fed’s rate decision and new summary of economic projections. 

LABOR COSTS ARE NOT AN INFLATION RISK 

Wages and salaries, which account for the bulk of labor costs, rose 0.8% last quarter after increasing 1.0% in the April-June quarter. They increased 3.5% on an annual basis. When adjusted for inflation, overall wages rose 0.6% in the 12 months through September after advancing 0.9% in the second quarter.

“There is nothing wrong here from the Fed’s point of view, although workers might be grumpy at slow real wage gains,” said Carl Weinberg, chief economist at High Frequency Economics. “These data support its assertion that labor costs are not contributing to inflation risks at this time.” 

Private-sector wages and salaries gained 0.8% last quarter. They increased 3.6% in the 12 months through September after rising 3.5% in the second quarter. 

The moderation in quarterly wage growth was led by the services sector, where salaries rose 0.7% after increasing 1.0% in the second quarter. Wages in the goods-producing industries increased 1.0%, matching the prior quarter’s advance.

State and local government wages rose 0.7% in the third quarter after increasing 0.9% in the April-June quarter. They increased  3.5% in the 12 months through September, slowing from 3.9% year-on-year growth in the second quarter.

Benefits for all workers advanced 0.8%. That followed a 0.7% rise in the second quarter. They increased 3.5% in the 12 months through September after rising by the same margin in the second quarter.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Nick Zieminski and Andrea Ricci)