U.S. productivity rebounds in second quarter, wage inflation muted

Second-quarter productivity rises at 2.5 per cent pace
By Lucia Mutikani/Reuters
|hrreporter.com|Last Updated: 08/08/2014

WASHINGTON (Reuters) — U.S. non-farm productivity rebounded more strongly than expected in the second quarter, but a sharp slowdown in unit labour costs pointed to still-tame wage pressures that could give the Federal Reserve room to keep interest rates low for a while.

The Labor Department said on Friday productivity increased at a 2.5 per cent annual rate after contracting at a revised 4.5 per cent pace in the first quarter, which was the fastest decline since the fourth quarter of 1981.

Productivity, which measures hourly output per worker, was previously reported to have declined at a 3.2 per cent rate in the first three months of the year.

Economists had forecast productivity rising at a 1.5 per cent rate in the April-June period.

The rebound in productivity follows a bounce back in gross domestic product in the second quarter. The economy grew at a four per cent rate after shrinking at a 2.1 per cent pace in the first quarter.

The trend in productivity, however, remains sluggish. Compared to the second quarter of 2013, productivity increased 1.2 per cent.

Workers put in more hours in the second quarter, but with output rising, that lowered labor costs.

Unit labor costs, the price of labor per single unit of output, rose at a 0.6 per cent rate after advancing at a revised 11.8 per cent rate, which was the quickest since the fourth quarter of 2012.

The Fed is keeping an eye on wage growth as it ponders the future course of monetary policy.

While the tame unit labor costs suggest the U.S. central bank should be in no hurry to start raising its benchmark overnight interest rate, which it has kept near zero since December 2008, other measures such as income and the employment cost index point to some firming of wage pressures.

In addition, there is growing anecdotal evidence that companies are raising wages. A compensation gauge produced by the National Federation for Independent Business is hovering at a seven-year high.

Unit labor costs were previously reported to have increased at a 5.7 per cent rate in the first quarter and economists had expected them to rise at a 1.4 per cent pace in the second quarter.

Compared to the second quarter of last year, unit labor costs rose 1.9 per cent, showing that wage inflation remained benign. They had increased 2.6 per cent in the first quarter.

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