Worker productivity in the U.S. unexpectedly stalled in the third quarter, driving labor costs higher and threatening Federal Reserve forecasts that inflation will subside.
Productivity, a measure of how much an employee produces per hour, was unchanged after a 1.2 percent gain in the second quarter that was weaker than previously estimated, the Labor Department said today in Washington. The price of labor rose at a 3.8 percent pace and was up 5.3 percent in the 12 months through September, an increase last exceeded in 1982.
The figures suggest that Fed Chairman Ben S. Bernanke and policy makers, who predicted last week that inflation is likely to moderate over time, may not get the rise in productivity that allowed former Chairman Alan Greenspan to deliver strong growth and low inflation. Labor costs, which typically account for two- thirds of a company’s expenses, reduce the benefit from falling raw-materials prices.
“The magic inflation elixir, productivity, may have run out and that does not bode well for inflation,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. “The labor cost numbers raise concerns that it may take quite a long time for inflation to settle down and decline significantly.” A weaker labor market may help ease some of the inflationary pressures. The Labor Department also said first- time jobless claims last week rose to a three-month high. A separate report from the Commerce Department today showed factory orders increased less than forecast in September.
Next Test The next test of the labor market’s strength comes tomorrow, when the government publishes its monthly payroll report. Employers added 120,000 new workers last month, more than double the 51,000 gain in September that was the weakest in a year, according to the median estimate of economists surveyed by Bloomberg News. Hiring would still fall short of this year’s 137,000 monthly average.
Productivity accelerated during Greenspan’s tenure, letting him hold down borrowing costs without fueling inflation as the economy soared in the late 1990s. The current slowdown in efficiency may make it difficult for Bernanke to achieve a similar outcome.
“It is a reminder to the Fed that with energy prices coming down, and other commodity prices, the biggest threat to inflation is wages,” said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh. “It is unmistakable businesses are under some greater labor-cost pressures.” After lagging behind for most of the past decade, Europe is now benefiting from a rebound in productivity. The European Central Bank today signaled it may lift its benchmark rate next month for the sixth time in a year. It kept the rate at 3.25 percent.
Jobless Claims Rise The number of Americans filing initial jobless claims jumped by 18,000 to 327,000, the highest since early July, from a revised 309,000 the week before.
“It would be worrisome if claims were to go higher from this level,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This report still pales in significance compared to what’s expected tomorrow.” Bonds fell after the report raised concerns mounting wage pressures would keep inflation from slowing. The yield on the 10-year Treasury note rose 3 basis points to 4.59 percent at 9:35 a.m. in New York. Stocks dropped.
In another report today, the Commerce Department said orders placed with American manufacturers rose less than forecast in September. Orders gained 2.1 percent after a revised 0.3 percent decline in August. Excluding the volatile transportation equipment category, demand dropped 2.4 percent.
Economist Estimates Economists had expected productivity to rise at a 1 percent annual rate for the third quarter, according to the median of 60 forecasts in a Bloomberg News survey. Unit labor costs were projected to rise at a 3.4 percent pace.
Compensation for each hour worked rose to an annual rate of 3.7 percent in the third quarter, compared with a 6.6 percent increase the prior quarter.
Productivity stalled because the 1.6 percent gain in hours worked at an annual pace equaled the increase in economic growth.
Among manufacturers, productivity rose at a 5.9 percent pace after rising 2.7 percent in the second quarter. Productivity at non-financial corporations, a measure watched by the Fed, rose at a 0.2 percent rate in the second quarter. Those figures are released with a one-quarter lag.
Raw-Material Prices A report yesterday showed inflationary pressures are easing. The Institute for Supply Management’s measure of prices paid by manufacturers dropped to the lowest level in more than four years last month, the group said.
Fed policy makers last week held their target for the interest rate on overnight loans between banks at 5.25 percent for a third month. In announcing the decision, they said that while “some inflation risks remain,” a slowing economy will probably cause inflation to moderate.
In the minutes of their September meeting, the central bankers said that still-high commodity prices, low unemployment and rising labor costs were among the things that raised the risk that inflation wouldn’t slow as expected.
Prior to both the August and September meetings, Fed economists reduced their estimate of how fast the economy can grow without fueling inflation, according to the minutes of the gatherings. A deeper-than-expected slowdown in productivity was one reason for the estimates were cut.
Sonoco Raising Prices Some companies are having to resort to raising prices as labor costs climb. Sonoco Products Co., which makes boxes, food cans and industrial packaging, said last month that third- quarter profit rose 33 percent as prices increased faster than raw-material costs.
The profit increase “reflected a continued favorable selling price/material cost relationship and the impact of productivity improvements, which were partially offset by higher energy, freight and labor costs,” said Harris Deloach Jr., Sonoco’s chief executive officer in an Oct. 18 statement.
Deloach said last month he will shut 12 plants and eliminate 540 jobs, or 3.1 percent of the workforce, to improve productivity and trim expenses.
