US fourth-quarter labor costs revised higher; productivity growth lowered

10:26 am Thursday, March 02nd, 2023

WASHINGTON (Reuters) – U.S. labor costs grew faster than initially thought in the fourth quarter, though the pace has slowed from the prior quarters.

Unit labor costs – the price of labor per single unit of output – accelerated at a 3.2% annualized rate last quarter, the Labor Department said on Thursday. That was revised up from the 1.1% pace reported last month.

Labor costs rose at a 6.9% rate in the third quarter, and notched hefty gains in the prior two quarters. Economists polled by Reuters had forecast labor costs being revised up to a 1.6% growth pace. Unit labor costs rose at a 6.3% rate from a year ago, revised up from the previously reported 4.5% pace.

They surged 6.5% in 2022, instead of 5.7% as reported last month, too fast to be consistent with the Federal Reserve’s 2% inflation target. Labor market tightness and stubbornly high inflation have stoked fears that the Fed could continue raising interest rates into summer.

The U.S. central bank is expected to deliver two additional 25-basis-point rate hikes in March and May, though financial markets are betting on another increase in June. The Fed has raised its policy rate by 450 basis points since last March from near-zero to a 4.50%-4.75% range.

Hourly compensation increased at a 4.9% pace, instead of a 4.1% rate as previously reported. It rose at an 8.2% rate in the third quarter and grew at a 4.4% rate compared to the fourth quarter of 2021.

With labor costs revised higher, growth in nonfarm productivity, which measures hourly output per worker, was downgraded to a 1.7% rate from the previously reported 3.0% pace in the fourth quarter. Economists forecast productivity growth being lowered to a 2.6% rate.

The downward revision to productivity was telegraphed by data last week showing gross domestic product growth for the fourth quarter trimmed to a 2.7% rate from the previously estimated 2.9% pace.

Productivity grew at a 1.2% pace in the third quarter. Productivity fell at a 1.8% rate from a year ago. For all of 2022, productivity fell 1.7%. That was revised down from the 1.3% published last month.

Large shifts in the composition of the workforce in the wake of the pandemic have made it harder to get a clear read of productivity.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)