US wage inflation moderate, Midwest manufacturing slumps

WASHINGTON: US labour costs rose at their slowest pace in 1-1/2 years in the second quarter, the latest sign of benign inflation that enabled the Federal Reserve to cut interest rates on Wednesday for the first time since 2008. Other data on Wednesday suggested a further slowdown in economic growth at the start of the third quarter. Manufacturing activity in the Midwest contracted for a second straight month in July, declining to its lowest level in more than 3-1/2 years. While private payrolls rebounded this month, the pace of growth remained moderate. The Fed cited “the implications of global developments for the economic outlook as well as muted inflation pressures” for its largely expected decision to lower its benchmark overnight lending rate by 25 basis points for the first time since the Great Recession. Fed Chairman Jerome Powell said the monetary policy easing, which he described as insurance against downside risks to the economy from trade tensions and slowing global growth, was “not the beginning of a long series of rate cuts.” The 10-year economic expansion, the longest in history, is facing headwinds from a bitter trade war between the United States and China, weakening global growth and Britain’s potential disorderly departure from the European Union. The Employment Cost Index, the broadest measure of labour costs, increased 0.6 per cent in the second quarter, the smallest gain since the fourth quarter of 2017, the Labour Department said. The ECI had increased 0.7 per cent for two straight quarters. In the 12 months through June, the ECI rose 2.7 per cent, slowing from a 2.8 per cent increase in the year through March. Economists polled by Reuters had forecast the ECI rising 0.7 per cent in the April-June period. The ECI is widely viewed by policymakers and economists as one of the better measures of labour market slack. It is also considered a better predictor of core inflation. Labour costs picked up over 2018 as a tightening labour market pushed up wage growth. The pace of increases has since slowed despite the unemployment rate being near a 50-year low. “The historical relationship between the unemployment rate and wage growth seems to have weakened somewhat during this business cycle, however, leading us to expect only measured incremental improvements in wage pressures,” said Blerina Uruci, an economist at Barclays in Washington. The report came on the heels of data on Tuesday showing a key measure of inflation increased 1.6 per cent in the 12 months to June, continuing a pattern of slow gains that have seen it undershoot the Fed’s 2 per cent target this year. In the second quarter, wages and salaries, which account for 70 per cent of employment costs, rose 0.7 per cent after advancing by the same margin in the prior period. Wages and salaries were up 2.9 per cent in the 12 months through June, matching the gain in the year through March. — Reuters