The Economy

U.S. Labor Costs Growth Lowered to 2.5% for Q3

The sharp downward revision suggests inflation will continue to run below the Federal Reserve’s 2% target.
Matthew HellerDecember 10, 2019
U.S. Labor Costs Growth Lowered to 2.5% for Q3

U.S. labor costs grew at a slower rate in the third quarter than previously reported, indicating inflation will remain low.

The Commerce Department said Tuesday that unit labor costs, the price of labor per single unit of output, increased at a 2.5% annualized rate in the third quarter. It had previously reported a 3.6% gain.

Compared with the third quarter of 2018, labor costs grew at a 2.2% rate, rather than the previously estimated 3.1%.

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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.

The sharp downward revision in labor costs suggests inflation will probably continue to run below the Federal Reserve’s 2% target and “could also ease economists’ concerns about further pressure on corporate profits,” Reuters said, noting that other measures have been showing moderate wage gains.

The Fed’s preferred inflation measure increased 1.6% in the 12 months through October, slowing from 1.7% in September. The central bank is expected to keep interest rates steady on Wednesday after reducing rates in October for the third time this year.

The Commerce Department also confirmed that worker productivity fell by the most in nearly four years in the third quarter, suggesting the economy is unlikely to achieve the Trump administration’s goal of 3% annual growth.

Nonfarm productivity decreased at a 0.2% rate in the last quarter, as the increase in output was revised up to 2.3% from 2.1% and the hours workers spent on the job was raised to 2.5% from 2.4%. Productivity was previously reported to have decreased at a 0.3% pace in the July-September quarter.

It was the biggest drop in productivity since the fourth quarter of 2015. Productivity has risen at an average rate of just 1.3% since 2007, compared with a 2.1% average since the end of World War II.

“Productivity is likely to continue to lag unless there’s a rebound in business investment, but that probably won’t happen unless the [U.S.-China] trade dispute is largely resolved,” MarketWatch said.