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 The surprisingly smaller rise reported by the Labor Department on
Friday did little to temper expectations that the Federal Reserve is
set to raise interest rates later this year. The job market is fast
approaching full employment.
"Labor market fundamentals are improving, job openings are at record
highs, and slack on a steady downtrend. This is precisely how the
Fed will interpret this report, even if the numbers here are
atrocious," said Eric Green, chief economist at TD Securities in New
York.
The Employment Cost Index, the broadest measure of labor costs,
edged up 0.2 percent in the second quarter, the Labor Department
said. That was the smallest gain since the series started in the
second quarter of 1982 and followed a 0.7 percent rise in the first
quarter.
The weakness in compensation was concentrated in sales, information
and wholesale trade, occupations where workers are likely to receive
incentive pay. Commissions and bonuses helped lift worker
compensation at the start of the year.
Excluding commissions, compensation was up 0.6 percent in both the
first and second quarters, according to TD Securities.
Economists had forecast the employment cost index, widely viewed by
policymakers and economists as one of the better measures of labor
market slack, rising 0.6 percent in the second quarter.
At 5.3 percent, the unemployment rate is close to the 5.0 percent to
5.2 percent range that most Fed officials consider consistent with
full employment.
That tightening of the labor market, which is expected to eventually
translate into faster wage growth, has helped to hold consumer
sentiment at lofty levels over the past eight months.
SENTIMENT STILL HIGH
In a separate report, the University of Michigan's consumer
sentiment index slipped to 93.1 in July from 96.1 in June. Still,
the index was up 13.8 percent compared to July of last year.
Households expected their incomes to rise over the next two years,
in sharp contrast with another confidence survey published earlier
this week that had suggested a deterioration in consumers'
perceptions of the labor market.
"On balance, the Michigan survey suggests that consumer sentiment
remains broadly stable," said Jesse Hurwitz, an economist at
Barclays in New York.
Stocks on Wall Street were marginally higher, while the dollar fell
against a basket of currencies. Prices for longer-dated U.S.
Treasury debt rose.
In the second quarter, wages and salaries, which account for 70
percent of employment costs, rose 0.2 percent. That was also the
smallest increase on record and followed a 0.7 percent increase in
the first quarter.
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Private sector compensation failed to rise for the first time on
record. Compensation in the services sector nudged up 0.1 percent in
the second quarter after rising 0.6 percent in the prior period.
Compensation in the goods producing sector rose a solid 0.7 percent
after increasing 0.5 percent in the first quarter.
"If we took this as a sign of things to come in the labor market, we
might have to rethink the timing and pace of Fed rate hikes.
However, this report seems to be out of tune with other indicators
and anecdotal evidence," said John Ryding, chief economist at RDQ
Economics in New York.
In the 12 months through June, labor costs rose 2.0 percent, the
smallest 12-month increase since last year and a further slip below
the 3 percent threshold that economists say is needed to bring
inflation closer to the Fed's 2 percent medium-term target.
Benefits rose 0.1 percent in the second quarter, but economists said
that was mostly because of changes to the definition of retirement
benefits.
A third report from MNI Chicago showed factory activity in the
Midwest jumped to a six-month high in July. The Chicago Business
Barometer rose to 54.7, the first gain since April, from June's
reading of 49.4. A reading above 50 indicates expansion in the
region's manufacturing sector.
Both production and new orders expanded at the fastest pace since
the beginning of the year. A special survey question on wage growth
showed that 40 percent of respondents said wages had grown by 1
percent to 2 percent over the past year.
About 19 percent of respondents reported wages were up 3 percent to
4 percent and nearly a quarter said that wage growth was unchanged
over the year.
(Reporting by Lucia Mutikani; Editing by Paul Simao)
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