U.S. Unit Labor Costs Decline for Two Straight Quarters

U.S. unit labor costs were much weaker than initially thought, declining both in the second and third quarters of this year, suggesting that inflation could remain benign for a while.

The Labor Department said on Wednesday that unit labor costs, the price of labor per single unit of output, dropped at a 0.2 percent annualized rate in the last quarter instead of rising at a 0.5 percent pace as reported last month.

That followed a 1.2 percent rate of decline in the second quarter, which was previously reported as a 0.3 percent pace of increase. It was the first time since 2014 that unit labor costs recorded two straight quarterly declines.

The downward revisions to unit labor cost could intensify the debate on the future path of inflation at the Federal Reserve’s policy meeting next week.

Inflation has consistently undershot the Federal Reserve’s 2 percent target for nearly 5-½ years, despite the labor market being near full employment.

Compared to the third quarter of 2016, unit labor costs declined at a 0.7 percent rate. The increase in average hourly compensation was revised to down to a 2.7 percent rate from the previously reported 3.5 percent rate in the third quarter.

Hours worked rose at a rate of 1.1 percent in the July-September quarter, an upward revision to the previously reported 0.8 percent pace.

A separate report from a payrolls processor on Wednesday showed private employers created 190,000 jobs in November, down sharply from October’s unrevised at 235,000 positions.

The ADP National Employment Report is jointly developed with Moody’s Analytics. The ADP figures come ahead of the U.S. Labor Department’s more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment.

Economists polled by Reuters are looking for U.S. private payroll employment to have grown by 190,000 jobs in November, down from 252,000 the month before. Total non-farm employment is expected to have risen by 200,000.

Prices for U.S. Treasuries rose on the data, while the dollar was little changed against a basket of currencies.

The Labor Department also said growth in worker productivity was unrevised at a 3.0 percent rate in the third quarter, the quickest pace since the third quarter of 2014. Productivity grew at a 1.5 percent rate in the second quarter.

The trend in productivity, however, remains sluggish. Productivity increased at a 1.5 percent rate compared to the third quarter of 2016. Worker productivity has increased at an average annual rate of 1.2 percent from 2007 to 2016, below its long-term rate of 2.1 percent from 1947 to 2016.