U.S. worker productivity grew faster than expected in the fourth quarter, keeping unit labour costs contained and giving the Federal Reserve another boost in the fight against inflation.
Labour market momentum is also fading, though gradually, which could further help to curb wage inflation. First-time applications for unemployment benefits rose to a two-month high last week, other data from the Labor Department showed on Thursday. The number of people on unemployment rolls was also the highest in two months.
The reports followed news on Wednesday that compensation costs rose in the fourth quarter at the slowest pace since 2021.
The U.S. central bank left interest rates unchanged on Wednesday. Fed Chair Jerome Powell offered a sweeping endorsement of the economy’s strength, telling reporters that interest rates had peaked and would move lower in coming months.
“Inflation is increasingly coming back under control as the economy is more productive, keeping labour costs in check, and the labour market is rebalancing,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “This is what Fed officials are looking for in order to deliver the interest rate cuts the market is clamouring for later on this year.”
Nonfarm productivity, which measures hourly output per worker, increased at a 3.2 per cent annualized rate last quarter, the Labor Department’s Bureau of Labor Statistics said. Data for the third quarter was revised lower to show productivity growing at a still-solid 4.9 per cent rate instead of the previously reported 5.2 per cent.
Economists polled by Reuters had forecast productivity increasing at a 2.5 per cent rate. Productivity expanded at a 2.7 per cent pace from a year ago. Productivity growth averaged 1.2 per cent in 2023 after contracting 1.9 per cent in 2022.
Since the fourth quarter of 2019, labour productivity has grown at an annual rate of 1.6 per cent, 0.1-percentage point above the pace during the previous business cycle, which ran from the fourth quarter of 2007 through the fourth quarter of 2019. It is below its long-term rate of 2.1 per cent The economy grew at a 3.3 per cent rate in the fourth quarter.
Financial markets and most economists expect the Fed will start cutting rates in May. Stocks on Wall Street were trading higher. The dollar advanced versus a basket of currencies. U.S. Treasury prices rose.
Unit labour costs – the price of labour per single unit of output – rebounded at a 0.5 per cent rate last quarter after declining at a 1.1 per cent pace in the July-September quarter.
They rose at a 2.3 per cent rate from a year ago. Growth in unit labour costs averaged 2.9 per cent in 2023, slowing from 5.6 per cent in 2022.
Hourly compensation increased at a 3.7 per cent pace last quarter. It rose at a 5.0 per cent rate from a year ago. Hourly compensation gains averaged 4.2 per cent in 2023, up from 3.7 per cent in 2022.
The moderation in labour costs pushes the Fed closer to bringing inflation down to its 2 per cent target. The central bank has raised its policy rate by 525 basis points since March 2022 to the current 5.25 per cent-5.50 per cent range.
In separate report on Thursday, the Labor Department said initial claims for state unemployment benefits increased 9,000 to a seasonally adjusted 224,000 for the week ended Jan. 27, the highest level since November.
Economists had forecast 212,000 claims for the latest week. Claims remain low by historical norms.
Unadjusted claims rose 11,082 to 261,029 amid large increases in California, New York and Oregon. These more than offset notable decreases in Illinois and Missouri.
The claims report also showed that the number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 70,000 to 1.898 million during the week ending Jan. 20, also the highest level since November.
Despite the rise in claims, most employers are holding on to their workers following difficulties finding labour during and after the COVID-19 pandemic. But some companies, which enjoyed a boom in business during the pandemic are laying off workers as conditions revert back to normal. The United Parcel Service said this week it planned to cut 12,000 jobs.
A third report from global outplacement firm Challenger, Gray & Christmas on Thursday showed U.S.-based employers announced 82,307 job cuts in January, a 136 per cent jump from December. Layoffs were, however, down 20 per cent compared to January 2023.
Some economists were not perturbed by the surge in job cuts, with JPMorgan’s Daniel Silver noting that “these figures are not seasonally adjusted and layoff announcements usually increase between December and January.”
The claims data have no bearing on January’s employment report, scheduled to be released on Friday.
Nonfarm payrolls likely increased by 180,000 jobs last month, according to a Reuters survey of economists. The economy added 216,000 positions in December. The unemployment rate is forecast rising to 3.8 per cent from 3.7 per cent in December.
The labour market is shielding the economy from recession, by supporting consumer spending and demand for housing. A fourth report from the Commerce Department’s Census Bureau showed construction spending increased 0.9 per cent in December, buoyed by a 1.6 per cent jump in outlays on new single-family projects.
Solid demand for goods left manufacturing on the verge of recovery in January, a fifth report from the Institute for Supply Management showed. Comments from manufacturers varied from “good start to the year,” to “demand continues to be slow.”
“We are not out of the woods, but even the beleaguered factory sector is shaking off the gloomy recession vibes,” said Shannon Seery Grein, an economist at Wells Fargo in Charlotte, North Carolina.