Labor Costs Up More Than Forecast
U.S. labor costs rose much faster in recent quarters than first thought, the government said Thursday in a report suggesting that more interest rate increases may be needed to quell inflation pressures.
The Labor Department said in the same report that business productivity increased at a 2.9% pace in the first quarter, close to Wall Street forecasts and ahead of the 2.6% advance reported a month ago.
Separate reports showed temporary auto industry layoffs led to a larger-than-expected rise in claims for jobless benefits last week, while orders for factory goods rose 0.9% in April, the largest gain since November.
But markets focused on the unit labor costs -- a key price-pressure gauge that measures labor costs for any given unit of production -- which rose at a 3.3% annual rate in the first quarter, well ahead of expectations, as worker compensation measures were revised upward.
“This is seriously bad news for the [Federal Reserve],” said Ian Shepherdson, chief U.S. economist at High Frequency Economics. “Costs appear to be spiraling rapidly and it strongly argues for substantially higher interest rates.”
The first-quarter rise in unit labor costs followed a revised 7.7% fourth-quarter clip that was the fastest since the first quarter of 2000 and well ahead of the 1.7% rate previously reported for the fourth quarter. The third-quarter measure was revised upward as well.
Wall Street economists had expected first-quarter unit labor costs to be revised to a 2% clip from an initially reported 2.2%.
Unit labor costs have jumped 4.3% over the 12 months ended in the first quarter, the largest increase since the period ended in the third quarter of 2000.
Many economists said the report implied mounting pressure on inflation and profits and, in turn, higher interest rates.
The Fed has pushed overnight borrowing costs up eight times in the last year to 3% and is expected to bump them up another quarter-percentage point at its next meeting June 29-30.
In a separate report, the Labor Department said first-time claims for state unemployment aid rose 25,000 last week to 350,000, the highest reading since late March.
A department analyst said comments from individual states indicated “a good portion” of the rise was due to temporary layoffs in the auto industry.
A four-week moving average of claims, which smooths weekly volatility to provide a clearer view of trends, moved up 3,500 to 334,500, its highest level since early April but one that economists viewed as still consistent with solid job growth.
In a third report, the Commerce Department said demand for planes and cars helped fuel the 0.9% rise in April factory orders. The department also revised March orders higher to a 0.7% advance from the previously reported 0.1% rise.
