Will Unit Labor Costs Confirm Wage Inflation Fears?

factoryFriday morning will bring the quarterly report on nonfarm productivity and unit labor costs. With the Employment Cost Index from last week having shown a pop much higher for the second quarter, economists and market watchers will likely be paying much more attention to this report than normal. The goal: to identify whether hat blip in wages and benefits is turning into higher operating costs for businesses in America.

As we are more focused on the labor cost in the equation this time around, we will look at what is released as the second reading first. Second-quarter unit labor costs are expected to have risen by 1.6% from for the previous quarter. The range listed by Bloomberg started at a gain of 0.3% and went as high as 7.5%, but that higher number feels like an outlier. The first-quarter unit labor costs were shown to have risen by 5.7%.

Bloomberg predicts the nonfarm business productivity business consensus estimate for the second-quarter will rise 1.4%, but there is a very wide range of estimates from -5.0% to 3.5%. The previous quarter was up 3.2%.

We saw an uptick in labor costs in the previous quarter in the Employment Cost Index by 2%, which caused some concern in the market that wage inflation was finally picking up. When the unit labor costs come out, we will have a better idea on whether wage inflation is something of real concern or just a blip on the radar.

Our idea on this matter is that if the unit labor costs come in above 2%, it would lend more credence to wage inflation and would validate what the Employment Cost Index suggested. If the report comes in closer to only 1%, then the market may suggest that the Employment Cost Index somehow missed the mark.

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Filed under: Economy

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