Productivity of US workers rises slightly in the third quarter, indicating a modest slowdown in labor costs

The US Department of Labor reported a moderate increase in labor productivity in the third quarter, due to a slight slowdown in labor costs

The US Labor Department reported moderate increases in labor productivity during the third quarter, due to only a slight slowdown in labor costs. This development could pose a challenge to the Federal Reserve’s inflation control efforts and could impact future interest rate decisions.

Productivity growth remains modest

In its quarterly update, the Bureau of Labor Statistics reported that nonfarm productivity, which measures the amount of hourly output per worker, increased at an annual rate of 2.2% in the third quarter. This growth reflects moderate increases in productivity, but remains below economists’ expectations for robust gains that could significantly ease inflationary pressures.

The report also included a downward revision for the second quarter, with productivity growth coming in at 2.1% instead of the previously reported 2.5%. Economists polled by Reuters had expected productivity growth of 2.3%, suggesting recent gains have fallen short of the higher expectations needed to more fully allay inflation concerns.

On an annual basis, productivity showed an increase of 2.0%, which represents a steady but moderate pace. While this level of growth is positive, it suggests that economic output per worker is not increasing enough to offset rising labor costs or provide significant relief to inflation concerns.

Rising labor costs and inflationary pressures

Unit labor costs, a crucial measure that reflects the cost of unit labor, rose 1.9% in the July-September period, compared with a 2.4% increase in the previous quarter. While the slowdown in labor cost growth appears to be a positive sign, the gradual pace at which these costs decline remains a concern for the Federal Reserve as it struggles with inflation.

Labor costs increased 3.4% year-on-year, indicating that rising wages continue to put upward pressure on prices across the economy. The rate of growth in labor costs has a significant impact on inflation, because companies often pass on higher wages to consumers through price increases. If productivity growth lags behind labor costs, inflationary pressures could persist.

The Federal Reserve’s policy and interest rate cut expectations

With the inflation outlook remaining bleak, the Federal Reserve is expected to announce a rate cut later today. Analysts expect a reduction of a quarter point, bringing the target range to 4.50%-4.75%. The move would be the latest in a series of interest rate adjustments aimed at balancing economic growth and inflation control.

The Fed initially launched this cycle of rate cuts in September with an aggressive cut of half a percentage point, the first drop in borrowing costs since 2020. The decision was driven by a combination of global economic challenges and the need to control inflation. During 2022 and 2023, the Federal Reserve raised rates by a total of 525 basis points, significantly tightening monetary policy before this recent shift toward easing.

Wage growth and its role in economic stability

The report also highlighted trends in employee compensation. Wages rose 4.2% in the third quarter, following a 4.6% increase in the previous quarter. On an annual basis, remuneration increased by 5.5%. While rising wages are good for workers, they could contribute to inflationary pressures if productivity growth does not keep pace.

The moderate increases in worker wages underscore a delicate balance for the Federal Reserve. Wage growth often benefits consumer spending, which stimulates economic activity, but also increases inflation risk. Higher pay levels generally lead to higher labor costs, which companies can offset by raising prices. For the Fed, managing these dynamics is a complex challenge because its dual mandate includes supporting employment and maintaining price stability.

Productivity, inflation and future tariff decisions

As the Fed assesses economic data, moderate productivity gains and steady wage growth indicate that inflation could remain persistent. Productivity is a crucial factor for inflation because if workers produce more output per hour, companies can keep prices more stable without jeopardizing profits. However, recent data show that productivity gains are not keeping pace with rising labor costs.

These factors are likely to weigh heavily in the Fed’s future policy decisions. While the Fed’s current stance suggests further rate cuts, any sustained rise in inflation could prompt a return to tightening measures. Balancing these variables will be essential if the US The central bank is taking up the challenge of supporting economic growth while curbing inflation.

For now, the Fed’s response will be closely watched as it continues to maneuver through an economy characterized by subdued productivity growth, steady wage increases and persistent inflationary pressures.