U.S. labor costs rose less than expected in the fourth quarter, leading to the smallest annual increase in two years, signs of moderating wage inflation that could give the Federal Reserve room to start cutting interest rates by June.
Compensation costs growth is slowing as labor market conditions ease in response to the U.S. central bank's tight monetary policy stance. Government data on Tuesday showed Americans were becoming less enthusiastic about job-hopping, with the number of people quitting their jobs near a three-year low in December, a trend that could further slow wage inflation.
Fed officials are expected to keep rates unchanged at the end of a two-day policy meeting on Wednesday against the backdrop of a resilient economy, which is being anchored by the labor market through consumer spending.
"Not great news for our pay checks, but good news for inflation and the prospect of meaningful Fed policy easing," said James Knightley, chief international economist at ING in New York.
The Employment Cost Index (ECI), the broadest measure of labor costs, increased 0.9% last quarter, the Labor Department's Bureau of Labor Statistics said on Wednesday. That was the smallest quarterly gain since the second quarter of 2021 and followed a 1.1% advance in the July-September period.
Economists polled by Reuters had forecast the ECI gaining 1.0%. Labor costs increased 4.2% on a year-on-year basis, the smallest rise since the fourth quarter of 2021, after climbing 4.3% in the third quarter.
Annual compensation growth peaked at 5.1% in 2022. The labor market is gradually easing. There were 1.4 job openings for every unemployed person in December. Though this ratio was steady from November, it has declined from two jobs in March 2022. Financial markets have lowered the odds of a rate cut in March to below 50%.
Since March 2022, the U.S. central bank has raised its policy rate by 525 basis points to the current 5.25%-5.50% range. The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.
BIG GAINS FOR UNION WORKERS
Wages rose 0.9% in the fourth quarter after gaining 1.2% in the prior three months. They increased 4.3% year-on-year after advancing 4.6% in the July-September quarter.
Private sector wages also climbed 0.9%. They rose 4.3% on a year-on-year basis and slowed from an increase of 5.1% compared to the same period in 2022.
Compensation costs rose 4.5% for union workers on an annual basis and were up 4.0% for non-union workers. Wages and salaries for union workers advanced 5.4% compared to the 4.2% rise for non-union workers. Unions, including the United Auto Workers and Teamsters, secured large pay raises for their members last year.
State and local government wages rose 1.1% after surging 1.8% in the prior quarter. They increased 4.7% on a year-on-year basis after rising 4.8% in the third quarter.
Inflation-adjusted wages for all workers gained 1.0% on a year-on-year basis after rising 0.9% in the third quarter. The rise in purchasing power should help to underpin consumer spending and could keep the economy from recession.
Benefits increased 0.7% after gaining 0.9% in the July-September period. They rose 3.8% on a year-on-year basis.
Cooling wage inflation was also evident in the ADP National Employment Report on Wednesday, which showed year-over-year pay increases for people staying in their jobs rising 5.2% in January after increasing 5.4% in December. Wages for workers changing jobs rose 7.2%, the smallest gain since May 2021.
The ADP report also showed private payrolls increased by 107,000 jobs in January after rising 158,000 in December. Economists had forecast private payrolls rising 145,000. The smaller-than-expected increase in private payrolls, however, likely overstates the slowing labor market momentum.
Though job growth has slowed from the brisk pace seen in 2022, the labor market remains healthy.
According to a Reuters survey of economists, the Labor Department's Bureau of Labor Statistics is expected to report on Friday that private payrolls rose by 155,000 jobs in January. Total nonfarm payrolls are estimated to have increased by 180,000 jobs after rising 216,000 in the prior month.
