It seems like some time has passed since there was good news to report about underlying inflationary pressures in the U.S. economy. Today we received just that. From Bloomberg:
The productivity of U.S. workers accelerated last quarter and labor costs slowed over the last year, easing concern that rising wages will fuel inflation.
Productivity, a measure of how much an employee produces for every hour of work, rose at a 3.7 percent annual rate from January through March, compared with a 0.3 percent drop the previous three months, revised figures from the Labor Department showed today in Washington. Labor costs rose at a 1.6 percent annual rate last quarter and were up 0.3 percent in the 12 months ended in March, matching the smallest increase in more than a year.
Greater efficiency is helping businesses control labor costs, allowing them to withstand surging raw-material prices without resorting to large price increases. Smaller labor-cost gains will come as a relief to Federal Reserve policy makers concerned about inflation and may tip the balance in favor of holding interest rates steady at the Fed's next meeting June 28- 29, economists said...
Unit labor costs, "which are the most important driver of core inflation, are very muted,'' David Rosenberg, chief economist for North America at Merrill Lynch & Co. in New York, said in a May 25 report to clients. "It does add more credence to the view that the Fed remains on the sidelines in June.''
No argument about the importance of unit labor costs here, but it is useful to remember that this is data from the first quarter, and our first entries into the inflation story for quarter II -- here and here, in case you have forgotten-- were not calming. Nonetheless, the unit labor cost data that wrought so much hand-wringing when the preliminary report was released now looks more in line with the trajectory of the employment cost index over the first part of this year, helping to reconcile some of the ""divergent readings" from "alternative measures of labor compensation provided" noted by the FOMC at its May meeting.
Furthermore, the real side of the economy is apparently in full moderating mode. From Reuters:
U.S. factory expansion eased in May to the slowest pace since August while April pending home sales slipped for the third straight month, reports showed on Thursday, indicating the red hot pace of economic growth at the start of the year may be cooling.
Of course, as we illustrated yesterday:
... financial futures still reflect a roughly three-in-four chance the Federal Reserve will increase interest rates for the 17th consecutive time this month since June 2004.
But that could all change with tomorrow's employment report -- one way or the other.