US labour costs add to inflation threat

US labour costs add to inflation threat
By Daniel Pimlott in New York
Copyright The Financial Times Limited 2007
Published: March 6 2007 15:20 | Last updated: March 6 2007 15:20



US labour costs soared to a much higher level than previously estimated while efficiency at work sank to almost half the initially reported figure in the final quarter of last year, raising the threat of inflationary pressures.

The Labor Department said that revised data on non-farm workers showed that productivity had actually grown by 1.6 per cent between October and December, at an annualised rate, rather than the 3 per cent which it first reported. This was largely in line with predictions for the revised figures by Wall Street economists.

The poorer levels of efficiency at work meant that the cost of labour shot up by almost four times as much as initially reported. Labour costs grew by 6.6 per cent rather than the previously reported 1.7 per cent rate. This easily beat Wall Street estimates for a revised figure of 3.2 per cent.

About half of the rise in labour costs was down to one-off bonuses at the end of the year, according to estimates by Abiel Reinhart, an economist at JPMorgan Chase.

Hourly pay rose by 8.2 per cent.

“Because of the temporary nature of these bonus payments, annualised growth in unit labour cost should decelerate sharply or decline in the quarters ahead; such has been the experience in the aftermath of similar surges in the past,” said Mr Reinhart. “That qualification notwithstanding, unit labour cost has been trending up since early 2004 and, even after discounting for the temporary surge in the fourth quarter, is a source of upside inflation risk and downward pressure on profits.”

The weaker productivity figures and higher labour costs came as Alan Greenspan warned there was a “one-third probability” of a US recession in 2007 in an interview with Bloomberg News. The former Fed chairman’s comments on the possibility of recession helped to rock turbulent markets last week, and contrasts with the view of Ben Bernanke, current chief of the Fed, who recently delivered an upbeat assessment of the economy.

The major downward revision to productivity reflected the big cut in the reported level of US economic growth last week. GDP growth estimates were slashed to 2.2 per cent for the last quarter of 2006 from an initially announced growth rate of 3.5 per cent.

Lower output in the economy, while hours worked remained the same, meant that the amount produced per worker in the quarter fell, while the unit cost of labour rose.

But productivity growth was still an improvement on the third quarter of last year when productivity fell by 0.5 per cent.

The Federal Reserve has maintained a hawkish attitude to inflationary pressures and pays close attention to rising labour costs as it weighs up its decisions over the setting of interest rates.

For the whole of 2006 productivity rose by 1.6 per cent, the lowest level since 1997.

“On the one hand, stronger wage growth should shore up consumer spending and GDP growth the first half of 2006, however, it does explain some of the inflationary pressures recorded the second half of 2006,” said Peter Morici, a professor at the Robert H. Smith School of Business. “Workers were able to recoup real income lost to high energy prices.”