U.S. labor costs has been experiencing its most sluggish growth in close to two years in the second quarter. This latest metric of minor inflation could open the door for the Federal Reserve to finally cut interest rates on Wednesday for the first time in a decade.
The standard measure of American labor costs, the Employment Cost Index, saw a meager increase of only 0.6%, the smallest gain the index has realized since the fourth quarter of 2017, the Labor Department reported Wednesday morning. The ECI had increased by 0.7% for two straight quarters now. In the 12 month period ending in June this year, the ECI rose a total of 2.7%, missing the mark of a 2.8% increase in the year through March.
The ECI is a trusted statistic by policymakers and economists, and is considered as one of the better indicators of sluggishness in the labor market. It is also viewed as a better predictor of core inflation. Labor costs were gaining in 2018 as a stable labor market in the U.S. drove up wage growth. The increase of these costs has sputtered since then.
The report came on the back of data released on Tuesday, showing a measure of inflation increased 1.6% in the 12 months to June, continuing a pattern of sluggish gains that have seen it miss the Fed’s key 2% target this year.
Low inflation combined with slowing economic growth are expected to nudge U.S. central bank officials to make a desired interest rate cut when they conclude a two-day policy meeting later on Wednesday. The U.S. economy is cooling from the boost seen last year, following a $1.5 trillion tax cut package that is soon fading out. The bitter trade war between the United States and China, slowing global growth, and Britain’s potential disorderly departure from the European Union are all compounding factors that are taking a negative toll on the American economy.
Prices of U.S. bond notes were trading higher on Wednesday while the dollar was largely unchanged against a medley of currencies as traders are keen to hear the awaited Fed’s decision on rates. U.S. stock index futures were up on this expectation.
Job gains in the second quarter, including the measurement of wages and salaries, accounts for 70 percent of employment costs, which rose 0.7% after rising by the same margin in the preceding period. Wages and salaries were up 2.9% in the 12 months through June.
Wages and salaries rose 0.6% in the private sector for the second quarter after increasing 0.7% in the first quarter. State and local government wages and salaries rose 0.5% after increasing 0.6% in the first quarter.
Benefits in the manufacturing industry rose a modest 0.5% after an impressive 0.9% gain in the first quarter. Overall, benefits have increased 2.3% in the 12 months through June, the smallest gain seen since the year-to-year period ending in March 2017, when benefits rose by 2.6%.
The ADP National Employment Report came out today and showed payrolls in the private sector jumped by 156,000 jobs in July after increasing 112,000 in June. The ADP report, which is developed by Moody’s Analytics, the trusted financial services and ratings company, has predicted the private payrolls component of the government’s employment with extreme accuracy in their reports in each of the last two months. It is likely that the ADP will do the same.
After employment numbers surged by 224,000 in June, economists expect to see employment to increase by 162,000 jobs. Compared to last year, job gains have been disappointing as a total of 172,000 per month in the first half of this year has been the average, which is far off the pace of 223,000 monthly average in 2018. The pace of job gains has remained above the roughly 100,000 per month necessary to keep up with the growth of the current working-age population. The unemployment rate is believed to stay at 3.7% in July like it was in June.
