WASHINGTON: US labour costs increased 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 (Jan 31) showing house price growth slowing considerably in November. The reports were 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 scaling back the pace of its interest rate increases.
“The Fed’s rate hikes in 2022 were successful at cooling an overheated economy,” said Bill Adams, chief economist at Comerica Bank in Dallas. “But policymakers want to see a wider margin of slack open up to be confident that the slower inflation in late 2022 becomes the trend.”
The Employment Cost Index, the broadest measure of labour costs, rose 1 per cent last quarter, the Labor Department said. That was the smallest advance since the fourth quarter of 2021 and followed a 1.2 per cent gain in the July to September period.
Economists polled by Reuters had forecast the ECI would rise 1.1 per cent. Labour costs increased 5.1 per cent on a year-on-year basis after climbing 5 per cent in the third quarter. They remain higher than the 3.5 per cent that Fed officials and economists view as consistent with tame inflation. The Fed has a 2 per cent inflation target.
The ECI is viewed by policymakers as one of the better measures of labour market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.
The Fed last year raised its policy rate by 425 basis points from a near-zero level to a 4.25 per cent to 4.5 per cent range, the highest since late 2007. Though the central bank has shifted to smaller rate increases, it is unlikely to stop tightening monetary policy.
The Fed’s “Beige Book” report this month described the labour market as “persistently tight”, noting that “wage pressures remained elevated across districts” in early January, though five regional “Reserve Banks reported that these pressures had eased somewhat”.
While annual growth in average hourly earnings in the Labor Department’s monthly employment report has cooled, wages remain high. The Atlanta Fed’s wage tracker also moderated, but stayed elevated in the fourth quarter.
Labour market tightness was underscored by a separate Conference Board report showing its consumer survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, increased to 36.9 in January from 34.5 in December.
This measure correlates to the unemployment rate from the Labor Department, and the rise was consistent with tight labor market conditions. The government will on Wednesday publish job openings data for December. There were 10.5 million job openings on the last business day of November.
Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. US Treasury prices were mixed.
HOUSE PRICES COOLING
“Easing labor cost growth should not be conflated with benign labour cost growth,” said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina. “The labour market remains incredibly tight. While the deceleration in labour costs is a welcome development, it is too soon to declare that it will stay there for the long haul.”
Wages and salaries increased 1 per cent in the last quarter, also the smallest gain since the fourth quarter of 2021, after rising 1.3 per cent in the third quarter. They were up 5.1 per cent on a year-on-year basis after rising by the same margin in the prior quarter.
Private-sector wages rose 1 per cent, slowing from a 1.2 per cent advance in the third quarter. Private industry wages increased 5.1 per cent on a year-on-year basis after rising 5.2 per cent in the July to September quarter.
The moderation in wage growth was more pronounced in the leisure and hospitality sector, where wages and salaries gained 0.9 per cent after increasing 1.8 per cent in the third quarter. Employment in this industry remains below pre-pandemic levels.
But wages in the financial activities industry shot up as did those in wholesale trade. Construction wages rose solidly.
State and local government wages climbed 1 per cent last quarter after surging 2.1 per cent in the third quarter.
Higher inflation, however, continued to eat into consumers’ purchasing power. Inflation-adjusted wages for all workers fell 1.2 per cent on a year-on-year basis in the fourth quarter.
Benefits rose 0.8 per cent last quarter after increasing 1 per cent in the third quarter. They were up 4.9 per cent on a year-on-year basis.
The Fed’s rate-hiking cycle, the fastest since the 1980s, is dampening house price inflation. The S&P CoreLogic Case-Shiller national home price index, covering all nine US census divisions, increased 9.2 per cent on a year-on-year basis in November, pulling back from October’s 10.7 per cent gain.
House prices measured by the Federal Housing Finance Agency rose 8.2 per cent in the 12 months through November after climbing 9.8 per cent in October. A persistent shortage of homes for sale is, however, likely to prevent a sharp decline in house prices.
“A dearth of inventory, no forced selling and the back-off in mortgage rates are helping to contain the fallout,” said Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.
Despite consumers’ upbeat views of the labour market, they remained gripped by fears of a recession over the next six months, with many adopting a wait-and-see attitude toward 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 per cent from 6.6 per cent last month.
“We project that a moderate recession will take hold by mid-year, although the downside for this downturn should be limited by solid financial fundamentals for most households and businesses,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.