Labor Costs Climb, Raising Hopes of Wage Growth--Update

By Ben Leubsdorf 

U.S. labor costs accelerated in early 2015, a sign that the job market may be tightening and beginning to generate a long-awaited pickup in workers' wages.

A separate gauge of prices, however, suggested little change in underlying U.S. inflation pressures.

The employment-cost index, a broad measure of wage and benefit expenses, rose a seasonally adjusted 0.7% in the first quarter, up from its 0.5% gain in the final three months of 2014, the Labor Department said Thursday. Economists surveyed by The Wall Street Journal expected the gauge would rise 0.6%.

On an annual basis, labor costs rose 2.6% in the first quarter, accelerating from 2.2% growth in the third and fourth quarters. Private-industry wages and salaries jumped to 2.8% annual growth in early 2015 from 2.2% in the final three months of last year, registering their strongest year-over-year growth since the third quarter of 2008.

"The trend...has accelerated noticeably over the past few quarters, suggesting that reduced slack in the labor market has put some upward pressure on compensation," J.P. Morgan Chase economist Daniel Silver said in a note to clients.

A number of big U.S. companies have announced pay increases in recent months, seeking to attract and retain workers in a tighter market. McDonald's Corp. plans to raise wages starting this summer at the roughly 1,500 U.S. restaurants it owns, though the move won't apply to the franchisees that operate nearly 90% of the chain's restaurants. Retailers Wal-Mart Stores Inc. and Target Corp. also have announced plans to raise pay, as has health insurer Aetna Inc.

After four or five years of wages rising 1% annually, Cheesecake Factory Inc. expects its worker pay to increase 3% this year, in part due to higher state minimum wages.

"We know that we're going to be managing more wage rate inflation than what we've seen in the past," Chief Financial Officer Doug Benn told analysts last week.

The overall trend of growth in wage and benefits costs may be a signal that the U.S. economy has finally improved to the point where workers' wages, which have been stuck at roughly 2% annual growth for a half-decade, are beginning to climb.

But the year-over-year jump in Thursday's report may have been exaggerated somewhat by the weak reading for employment costs in the first three months of 2014, when wage and benefit expenses climbed just 0.3% on the quarter.

Morgan Stanley economist Ted Wieseman also noted that the pickup was concentrated in workers whose pay includes incentives like sales commissions. "There's been significantly less recent underlying acceleration in regular pay than suggested by the headline results," he said in a note to clients.

Another broad measure of U.S. wage growth has remained largely flat in recent months. Average hourly earnings for private-sector workers rose 2.1% in March from a year earlier, little changed from the 2% annual average since the beginning of 2010, according to separate Labor Department data.

Employers like Murphy USA Inc., an El Dorado, Ark.-based chain of gas stations, aren't feeling much more pressure on labor costs.

"We've been able to keep wages, frankly, largely in check," Chief Executive Andrew Clyde said on a conference call in mid-April.

There's also little sign of a pickup for subdued U.S. price growth. The personal consumption expenditures price index, which is the Fed's preferred inflation gauge, rose 0.3% in March from a year earlier, unchanged from the prior month and well below the central bank's 2% annual target, the Commerce Department said Thursday. Prices excluding the volatile categories of food and energy rose 1.3% on the year for the fourth consecutive month.

Still, Thursday's ECI report clearly showed gains in the first quarter compared with the prior three months. Civilian worker wages and salaries, which make up roughly 70% of compensation costs, rose 0.7% compared with 0.6% growth in the fourth quarter. Benefit costs rose 0.6%, matching their growth in the final three months of 2014.

"Workers finally appear to be benefitting from the tighter labor market, " PNC Financial Services Group chief economist Stu Hoffman said in a note to clients.

Economists say that price and wage increases should gain traction as the economy heals, the labor market tightens and employers compete to hire from a shrinking pool of available workers. But U.S. inflation remains sluggish and wage growth has stagnated since the recession ended in mid-2009.

"The low rate of wage growth is, to me, another sign that the Fed's job is not yet done," Federal Reserve Chairwoman Janet Yellen said last year.

The Fed is preparing to increase interest rates, perhaps as early as this summer, and policy makers are watching for signs of tightening in the labor market. The central bank reiterated in its policy statement on Wednesday that it will raise rates when the labor market has improved further and when officials are "reasonably confident" that inflation will move back toward their 2% annual goal.

Stronger wage growth could be an important signal. A pickup in wages isn't "indispensable for me to achieve reasonable confidence," Ms. Yellen said in late March. But she also said she would be "uncomfortable" raising rates if wage growth appeared to weaken.

The ECI, which covers both private-sector workers and government employees, averaged 0.5% quarterly growth in 2010 through 2014. But it appeared to start firming last year, and has posted 0.7% growth in three of the last four quarters.

"There are signs of wages beginning to rise in a variety of places," Fed Vice Chairman Stanley Fischer said in mid-April.

The labor market saw robust growth last year. U.S. employers added 3.1 million jobs in 2014, the strongest year of payrolls growth since 1999. The unemployment rate fell to 5.6% in December from 6.7% a year earlier.

But while the jobless rate edged down to 5.5% as of March, the pace of hiring decelerated sharply in the first three months of 2015. Seasonally adjusted payrolls rose by a monthly average of 197,000 in the first quarter, down from 324,000 per month in the fourth quarter.

At the same time, broader economic growth slowed to a crawl. Gross domestic product, the broadest measure of goods and services produced across the U.S. economy, grew at a 0.2% seasonally adjusted annual rate in the first quarter, the Commerce Department said Wednesday. GDP had expanded at a 2.2% pace in the fourth quarter, down from a 5% growth rate in the third quarter of 2014.

Write to Ben Leubsdorf at [e-mail]

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