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 The Labor Department said on Friday productivity increased at a 2.5
percent annual rate after contracting at a revised 4.5 percent pace
in the first quarter. The first quarter's drop was the sharpest
since the fourth quarter of 1981.
The bounce back kept labor-related production costs in check. They
had surged at the start of the year as an unusually cold winter
depressed output.
Unit labor costs, the price of labor for any given unit of
production, rose at a 0.6 percent rate, braking sharply from an
upwardly revised 11.8 percent pace in the first quarter.
"The key message here is that labor costs remain subdued and
unlikely to represent a source of rising production costs and or
inflationary pressures any time soon," said Anthony Karydakis, chief
economic strategist at Miller Tabak in New York.
The Fed is keeping a close eye on wage growth as it ponders when to
raise benchmark interest rates, which it has kept near zero since
December 2008. Investors do not expect a rate increase until around
the middle of next year.
With productivity stepping up, there is more room for workers to win
wage hikes without pressuring inflation or profits. Compared to the
second quarter of last year, unit labor costs were up just 1.9
percent, below the central bank's 2 percent inflation target.
Even so, pay is accelerating.
The report showed compensation per hour increased at a 3.1 percent
rate in the second quarter, and was up by the same amount from a
year earlier. In comparison, hourly compensation advanced only 1.1
percent last year.
COMPENSATION RISING
Other gauges, such as the government's measure of personal income
and its employment cost index, a broad gauge that is one of Fed
Chair Janet Yellen's favorites, have also pointed to some firming of
wage pressures.
"Today's report doesn't say that labor costs are a problem yet, but
it hints at some improvement in pay," said Joel Naroff, chief
economist at Naroff Economic Advisors in Holland, Pennsylvania. "Fed
members, at least the inflation hawks, will likely look at the
report as supporting their view that it is time to change
direction."
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It is unlikely that productivity will continue to advance at the
second quarter's pace. Over the past three years, it has never
topped 1 percent on an annual basis.
"Unless productivity growth shows signs of accelerating in the near
future, labor costs could begin to put some pressure on profit
margins," said Alan MacEachin, an economist at Navy Federal Credit
Union in Vienna, Virginia.
The second-quarter rebound reflected a sharp step up in gross
domestic product in the second quarter. The government said last
week that the economy grew at a 4.0 percent rate after shrinking at
a 2.1 percent pace in the first quarter.
The second-quarter growth estimate, however, is likely to be trimmed
when the figures are revised later this month, with a report on
Friday from the Commerce Department showing only a moderate gain in
wholesale inventories in May and June.
Economists said slow wholesale restocking could lower the
second-quarter GDP estimate by as much as three-tenths of a
percentage point, although data earlier this week showing a smaller
trade gap should help offset that a bit.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tim
Ahmann)
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