(Bloomberg) -- A broad gauge of US labor cost growth closely watched by the Federal Reserve cooled in the second quarter by more than forecast, supporting a trend of gradually easing inflationary pressures.
The employment cost index, which measures wages and benefits, increased 0.9% in the April-to-June period, after rising by the most in a year at the start of 2024, according to Bureau of Labor Statistics figures out Wednesday. The median estimate in a Bloomberg survey of economists called for a 1% rise.
The figures corroborate recent data that show the labor market is moderating toward its pre-pandemic trend. Other measures also point to cooling wage growth, as well as a slower pace of hiring and rising unemployment.
The S&P 500 opened higher and Treasuries extended gains.
Fed Chair Jerome Powell testified to Congress earlier this month that the job market is no longer an inflationary force, and he’s likely to give a similar assessment when he speaks at the conclusion of the central bank’s meeting later Wednesday. While policymakers are expected to hold interest rates steady, Powell may hint at a cut in September given the recent softness in the labor market and a broader easing in price pressures.
The trend is also expected to show up in Friday’s employment report, in which employers are forecast to have added the fewest number of jobs in three months and pay gains moderated in the year through July.
A separate report from the ADP Research Institute showed companies added the fewest number of jobs in July since the start of the year, and worker pay growth slowed. Economists will get another look at quarterly labor costs in a report Thursday, which takes changes in productivity into account.
What Bloomberg Economics Says...
“The Employment Cost Index’s softer second-quarter print will help allay Fed concerns that wage pressures will accelerate after several states raised their minimum wages earlier this year. Still, we expect officials to remain wary of catch-up wage pressures in the pipeline — particularly since some states that have inflation-indexed minimum wages won’t hike them until the third quarter.”
— Estelle Ou. To read the full note, click here
The second-quarter slowdown in employment cost growth was broad across private industries and included declines in construction, wholesale trade and information, according to Wednesday’s report. Compared with a year earlier, the ECI climbed 4.1%, the smallest annual advance since 2021.
Though there are a number of other earnings metrics published more frequently — including average hourly earnings figures from the monthly jobs report — economists tend to favor the ECI because it’s not distorted by shifts in the composition of employment among occupations or industries. It’s also the Fed’s preferred wage measure.
Wages and salaries for civilian workers increased 0.9%, the smallest advance in three years. They were up 4.2% from a year ago, also the least since 2021.
Adjusted for inflation, private-industry compensation grew 0.9%, while wages increased 1.1% — both accelerations from the start of the year. The strength of the jobs market, including positive real earnings growth, has been key to sustaining household demand. Data out last week showed consumer spending remained healthy in June, encouraging signs for officials looking to cool inflation without breaking the economy.
Wages for service workers in the private sector rose 1% from the prior quarter, unadjusted for inflation. Since compensation is a major cost for employers in this sector, Fed officials monitor it closely through a subset of inflation known as core services excluding housing.
Worker pay in goods-producing industries climbed 0.2%, the smallest advance since 2009. That included construction, where wages declined by the most on record.
--With assistance from Chris Middleton.
(Adds Bloomberg Economics comment)
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