US labour costs recorded their biggest gain in more than 5-1/2 years in the second quarter and a gauge of trends in the jobs market fell to an eight-year low last week, bolstering the economy's outlook. Though economists cautioned against reading too much into the rise in the employment cost index, they said a tightening jobs market suggested wage growth was poised for further gains.
"If the unemployment rate keeps declining, compensation pressures simply have to increase. Most members of the Federal Reserve appear to believe it will be a lot later and not very rapidly but I am not that sure," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. The Employment Cost Index, the broadest measure of labour costs, rose 0.7 percent, the Labour Department said on Thursday. That was the largest gain since the third quarter of 2008 and followed a 0.3 percent increase in the first quarter.
It is one of Fed Chair Janet Yellen's favourite labour market gauges and is being closely watched for clues on the timing of the first interest rate increase from the US central bank. Fed officials on Wednesday acknowledged the improvement in labour market conditions, but said "significant underutilization of labour resources" remained. Economists, who had forecast the employment cost index increasing 0.5 percent in the second quarter, are critical of the Fed's views on the labour market, particularly wages, as anecdotal evidence of companies raising wages increases.
"We do expect to see a steady inflection higher in wage growth going forward that we think will call into question the Fed's contention," said Ted Wieseman, an economist at Morgan Stanley in New York. In the 12 months through June, labour costs rose 2.0 percent. They had advanced 1.8 percent in the 12 months through March. Wages and salaries, which account for 70 percent of employment costs, increased 0.6 percent in the second quarter. That was the largest gain since the third quarter of 2008 and followed a 0.3 percent rise in the first quarter. Wages and salaries were up 1.8 percent in the 12 months through June after rising 1.6 percent in the 12 months through March. Benefit costs jumped 1.0 percent in the April-June period, the largest increase since the second quarter of 2011.