BAD COMBO

U.S. Economy: Labor Costs Rise, Productivity Slows (Update2) Listen

Sept. 7 (Bloomberg) -- U.S. labor costs rose by the most in almost five years and productivity growth slowed in the second quarter, suggesting the Federal Reserve will resist calls from Congress to stop raising interest rates.
The cost to companies of employing workers was 4.2 percent higher in the second quarter than in the year-earlier period, the Labor Department said today. Productivity, a measure of how much an employee produces for every hour worked, rose at a revised 1.8 percent annual rate from April through June, the slowest in nine months, after a 3.2 percent increase.
Lawmakers from both parties yesterday urged the Fed to forgo raising rates Sept. 20 to help consumers and businesses recover from the destruction of Hurricane Katrina. The increase in labor costs, following unexpected strength in the services industry for August reported yesterday, may give the Fed support to keep raising rates at a so-called measured pace, economists said.
``I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability,'' said Michael Moskow, president of the Fed Bank of Chicago, in a speech to the Futures Industry Association today. Concerns that inflation might jump need to be kept in check with ``appropriate'' increases in interest rates even though the hurricane may slow growth, he said.
Hiring accelerated in the past three months as companies kept pace with consumer and corporate demand. Gains in wages and labor costs, which account for two-thirds of the cost of goods and services, threaten to push up inflation as energy prices hold close to records following last week's storm.
Labor Costs
``Labor costs are quite firm and combined with slowing productivity, that is something that is going to concern the Fed,'' said David Sloan, senior economist at 4Cast Inc. in New York, in an interview. ``This is an argument for the Fed raising rates. We expect they'll continue to do so even with the effects of the hurricane.''
The average increase in labor costs over the past four quarters was 4.3 percent, more than double the 2 percent average of the record 10-year expansion that ended in March 2001. Treasuries maturing in 10 years or more fell after the report. The benchmark 10-year note fell 3/32, pushing up the yield 2 basis points to 4.12 percent at 1:06 p.m. in New York.
The year-over-year gain in labor costs was the most since the final three months of 2000.
Labor costs rose at a 2.5 percent annual rate during the quarter compared with the previous three months, the most since the end of last year. The median forecast in a Bloomberg News survey was for a 1.4 percent gain. Productivity was forecast to grow at a 2.1 percent rate after a previously reported 2.2 percent pace, according to the median of 60 forecasts.
Hiring Plans
In the 12 months that ended in March, labor costs rose 2 percent, compared with a previously estimated 2.3 percent gain. Year-over-year unit labor costs were revised from the 4.3 percent increase previously reported.
The U.S. added jobs every month since June 2003 and the labor force participation rate in August was the highest in more than a year. The unemployment rate fell to 4.9 percent last month, the lowest in four years, and companies added 169,000 jobs. Employers created an average of 195,000 jobs in the past three months, up from 180,000 for the previous three months.
U.S. corporate leaders were more optimistic about the economy in August than they were three months earlier, according to a survey of chief executives taken before Hurricane Katrina and released today.
Business Roundtable
The Business Roundtable's outlook index for the next six months rose to 95.9 from 94.3 in May, according to a poll of 117 members of the Washington-based lobbying group, which represents chief executives of the largest U.S. companies. The survey was taken Aug. 9 to Aug. 26.
``While it's too early to determine the exact toll Hurricane Katrina will have on the U.S. economy, the strength of the economy's fundamentals just prior to the disaster may prove to cushion its full impact,'' Hank McKinnell, chairman and chief executive officer of Pfizer Inc. and chairman of the business group, said in a statement.
Seventy-six percent said they expected hiring to increase or remain the same, up from 70 percent in May, the survey showed. They have to pull from a pool of available workers that fell in August to the lowest since September 2001, recent Labor Department data show.
Talent Shortage
``I think there is a looming shortage of talent coming,'' Joe Griesedieck, vice chairman of employment agency Korn/Ferry International, said in an interview on Sept. 2. ``The demand is such that the salaries will go up in all sectors of the market.''
Swift Transportation Co., the No. 3 U.S. trucking company, raised experienced drivers' pay earlier this year by 14 percent in an effort to attract qualified employees.
Among manufacturers, labor costs rose 4.7 percent and productivity increased 3.6 percent, today's report showed. For non- financial corporations, costs fell 2.6 percent and productivity surged 6.8 percent.
The Labor Department's measure of non-farm business output increased at a 4.1 percent annual rate in the second quarter after a 4.3 percent pace in the prior three months. At the same time, the index of the number of hours worked increased at a 2.2 percent pace in the second quarter, twice as fast as in the first three months.
To keep inflation from accelerating, Fed policy makers have raised interest rates 10 times since June of last year. Last month, they boosted their benchmark overnight bank lending rate a quarter percentage point to 3.5 percent.
Lawmakers
Some economists, including those at Goldman Sachs, Merrill Lynch and UBS Securities, predict the Fed may pause at its meeting on Sept. 20 because of the potential disruption to growth from Hurricane Katrina. Goldman Sachs lowered its third-quarter growth forecast to 3.5 percent from 5 percent.
Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, said in an interview yesterday that a pause in the Fed's cycle of rate increases ``would probably bring some confidence to people that are concerned about the overall economy'' following Hurricane Katrina.
The Congressional Budget Office said today in a letter to congressional leaders yesterday that growth will be slowed by 0.5 percentage point to 1 percentage point. The CBO also said the hurricane would result in the loss of 400,000 jobs.
Treasury Secretary John Snow, citing private forecasts, said yesterday that ``it would seem to make sense'' that higher energy prices, lost jobs and closed businesses stemming from Hurricane Katrina may slow U.S. economic growth by about 0.5 percent ``in the quarters ahead.''
Gasoline
Crude oil futures traded at a record $70.85 on Aug. 30 on the New York Mercantile Exchange after the hurricane curtailed production along the Gulf Coast.
Regular-grade gasoline, averaged nationwide, fell 1.6 cents to $3.041 a gallon Sept. 5, according to AAA, the nation's largest motoring organization. Prices surged to a record $3.057 on Sept. 2. Pump prices jumped 16 percent in the last week and are 64 percent higher than a year ago.
The higher costs could cut into corporate and consumer spending, and economists have been lowering their forecasts for economic growth.
``I think we will immediately see slower growth, but it will pick up eventually,'' former Fed Governor Susan M. Phillips said in an interview on Sept. 2. Phillips, now dean of George Washington University's business school in Washington, said third- quarter economic growth may be reduced by 0.5 percentage point to 1.5 percentage points.
`Robust Employment'
Bruce Kasman, head of economic research at JPMorgan Securities Inc. in New York, lowered his forecast for second-half growth by 0.75 percentage point, to 3.25 percent. He also raised his expectations for the first six months of next year to 3.75 percent, saying gasoline prices will fall and that businesses will boost hiring and spending.
``We're still looking at very robust employment at BankAtlantic Bancorp,'' Alan Levan, chief executive of BankAtlantic, said in an interview Sept. 2. ``We're hiring at every level of the organization.''
Today's productivity revision reflects the government's latest estimate on second-quarter gross domestic product, which was released on Aug. 30. The economy grew at a 3.3 percent annual pace from April through June, compared with the 3.4 percent estimated in July's report and down from 3.8 percent the first three months of the year. To contact the reporter on this story:
Courtney Schlisserman in Washington at cschlisserma@bloomberg.net.
Last Updated: September 7, 2005 13:09 EDT