US Employment Costs Post Smallest Gain on Record in Second-Quarter

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By Lucia Mutikani

U.S. labor costs in the second quarter recorded their smallest increase in 33 years amid tepid gains in the private sector, but it likely was a temporary setback against the backdrop of diminishing labor market slack.

The unexpectedly smaller rise reported by the Labor Department on Friday will probably not dampen speculation that the Federal Reserve is set to raise interest rates later this year. The U.S. labor market is fast approaching full employment.

The Employment Cost Index, the broadest measure of labor costs, edged up 0.2 percent, the Labor Department said. That was the smallest gain since the series started in the second quarter of 1982 and followed a 0.7 percent rise in the first quarter."This data has periodically proved to be very lumpy and the sharp deceleration is inconsistent with other measures of wage inflation that are trending higher, not falling off a cliff," said Eric Green, chief economist at TD Securities in New York.

Economists polled by Reuters had forecast the employment cost index, which is widely viewed by policymakers and economists as one of the better measures of labor market slack, rising 0.6 percent in the second quarter.

U.S. stock futures rose slightly after the data, while prices for U.S. Treasuries traded higher. The dollar fell against a basket of currencies.

The deceleration in labor costs likely does not suggest a material slowing in wage growth, as commissions inflated worker compensation at the start of the year. Labor market slack has diminished significantly over the last few years, which is expected to start putting upward pressure on wages.

"This is precisely how the Fed will interpret this report, even if the numbers here are atrocious. The broader trends are still unquestionably favorable," Green said.

At 5.3 percent, the unemployment rate is close to the 5.0 percent to 5.2 percent range that most Fed officials consider consistent with full employment. The ECI is also considered a better predictor of core inflation.

Wages and salaries, which account for 70 percent of employment costs, rose 0.2 percent in the second quarter, also the smallest increase on record. They had increased 0.7 percent in the first quarter.

Private sector wages and salaries were up 0.2 percent after gaining 0.7 percent in the prior quarter. Overall private sector compensation failed to rise for the first time on record.

Compensation in the services sector nudged up 0.1 percent in the second quarter after rising 0.6 percent in the prior period. Compensation in the goods producing sector rose a solid 0.7 percent after increasing 0.5 percent in the first quarter.

In the 12 months through June, labor costs rose 2.0 percent, the smallest 12-month increase since last year and further below the 3 percent threshold that economists say is needed to bring inflation closer to the Fed's 2 percent medium-term target.

(Reporting by Lucia Mutikani; Editing by Paul Simao)
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