U.S. Labor Costs Rise More Than Expected

Fear that wage gains will stoke inflation may lead the Fed to tread more carefully in its interest rate decision this afternoon.

U.S. labor costs grew at a surprisingly strong pace in the third quarter, and was much stronger than previously thought earlier this year, which risks fanning inflationary pressures. Unit labor costs, or what a business pays employees to produce one unit of output, increased at a 1.9 percent annualized rate, following significant upward revisions to prior quarters, data from the Bureau of Labor Statistics (BLS) showed Thursday.

The BLS said that the release incorporated revised historical data for the past five years, which informs the statistics. The revisions point to much stronger pay gains for Americans in recent quarters, underscoring why consumers have been able to power the economy forward at a robust clip.

Price-adjusted hourly compensation picked up to a 3 percent pace in the July-to-September period, marking a seventh straight quarter where pay has outpaced inflation.

The figures stand in contrast to other data that has consistently shown a moderation in earnings growth. That, in addition to a slew of strong economic data, presents a risk to inflation that may keep the Federal Reserve cautious in how much it lowers borrowing costs in the coming months.

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What Bloomberg Economists Say…

“Lower productivity in the third quarter and upwardly revised unit labor costs likely support a more gradual Fed rate-cut path on the margin—with the labor-cost revisions especially making Fed officials cautious.”

— Estelle Ou & Chris Collins, economists


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The central bank is widely expected to reduce its benchmark rate by a quarter point at the conclusion of its two-day meeting later today. The re-election of Donald Trump—whose proposals many economists say will stoke inflation—may also play a role in the trajectory of policy.

“The Fed may need to tread more lightly on the easing front, especially given upside risks to the growth outlook in light of the incoming administration,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.

Productivity, or non-farm business employee output per hour, rose at a 2.2 percent annualized rate in the July-to-September period after rising at a similar pace in the prior quarter. Unit labor costs grew 2.4 percent in the second quarter, well above the previously reported 0.4 percent advance.

On a year-over-year basis, productivity increased 2 percent in the third quarter, the slowest pace in over a year. Unit labor costs were up 3.4 percent, the most since the end of 2022.

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