U.S. Labor Costs Increase Moderately

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. labor costs increased moderately in the second quarter as private sector wages grew at the slowest pace in 3-1/2 years, providing more evidence that inflation is on a downward trend, potentially aiding an interest rate cut in September.

The Labor Department’s report showed inflation significantly subsided last quarter, with sub-3% readings across all measures. Labor costs are expected to cool further as the job market continues to ease.

Federal Reserve Chair Jerome Powell welcomed the cooler labor costs and stated, “our confidence is growing” that inflation is slowing and “the economy’s not overheating.”

The U.S. central bank kept its benchmark overnight interest rate in the 5.25%-5.50% range, unchanged since last July, but signaled a possibility of lowering borrowing costs at its next meeting in September.

“Wages and salary increases in private industry are now aligning with Fed officials’ preferences,” noted Christopher Rupkey, chief economist at FWDBONDS in New York. “The economy is gradually returning to normal. Cooler wages give the green light to Fed rate cuts.”

The Employment Cost Index (ECI), the broadest measure of labor costs, rose by 0.9% last quarter after a 1.2% rise in the first quarter. Economists had expected a 1.0% rise. Labor costs grew 4.1% over the year leading to June, the smallest gain since Q4 2021, down from 4.2% through March. Annual labor cost growth has decelerated from 4.5% in June 2023.

Policymakers view the ECI as a reliable measure of labor market slack and a predictor of core inflation, which the Fed targets at 2%.

Price pressures are easing following 525 basis points of rate hikes by the Fed since 2022. Job openings have shown a steady decline, and hiring reached its lowest level since 2020.

Stocks on Wall Street advanced, and the dollar weakened against a basket of currencies following the Bank of Japan’s rate hike to the highest level since 2008. U.S. Treasury yields also fell.

Wage and Salary Increases

Wages and salaries, which constitute the majority of labor costs, rose 0.9% last quarter, the smallest growth in three years, down from 1.1% in Q1. On an annual basis, they increased 4.2%, slower than the 4.4% rise in Q1. Once adjusted for inflation, overall wages saw a 1.2% gain over the year ending June, boosting consumer spending and economic growth last quarter.

Private sector wages climbed 0.8%, the lowest increase since Q4 2020, following 1.1% in Q1. For the year ending June, they rose 4.1%, a drop from 4.3% in Q1.

Wages for union workers increased by 6.5%, while salaries for non-union workers rose 3.8%. Wage growth in the construction sector declined, gains in manufacturing slowed, but strong growth was reported in retail, finance, insurance, and utilities sectors. Conversely, wage growth in the information industry nearly stagnated, and decreased in the wholesale trade sector.

The slowdown in wage gains was echoed in the ADP employment report, which recorded a 4.8% increase in salaries for employees staying in their jobs in July, the slowest rise in three years, down from 4.9% in June.

With fewer workers leaving their jobs in search of better opportunities, wage inflation is expected to trend lower.

State and local government wage gains also decelerated, increasing by 1.1%, down from 1.4% in Q1, but continued to trend higher annually, growing 5.1% compared to 5.0% through March.

Overall benefits for workers rose by 1.0% last quarter after a 1.1% increase in Q1, with a 3.8% annual rise up from 3.7% in Q1. Health benefits surged by 3.6% year-on-year after a 2.8% increase in Q1.

Housing Market Insights

Encouraging news came from the housing market, with a National Association of Realtors report showing a 4.8% rebound in contracts to buy previously owned homes in June, following a 1.9% decline in May. However, this does not indicate a significant recovery, as affordability remains a challenge.

Contracts leading to existing home sales, which are typically a month or two ahead, fell by 2.6% in June compared to the previous year.

“High mortgage rates and elevated prices will remain obstacles for buyers in the near term,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “However, increasing inventories and lower borrowing costs, as the Fed begins lowering interest rates, could positively influence home sales over time.”