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Growth in Productivity, Wages Eases

The second-quarter numbers won't change the Fed's course.
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Both productivity growth and wage pressures weakened in the second quarter, the government said Tuesday.

The Labor Department Tuesday reported that productivity rose at a 2.2% annual rate in the second quarter, down from a revised 3.2% rate in the first quarter. The rate of productivity growth was above the forecasts of Wall Street economists, who expected it to slow to 2% in the second quarter.

Unit labor costs, meanwhile, rose 1.3% in the quarter, a sharp deceleration from a 3.6% increase in the first quarter. Those costs were kept down thanks to much slower growth in employee compensation, which rose 3.5% in the second quarter compared with a 6.9% rate in the first.

Ahead of a widely expected quarter-point rate hike by the

Federal Reserve

this afternoon, the apparently inflation-free report gave a boost to the equity and bond markets early Tuesday.


Dow Jones Industrial Average

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was recently up 57.64 points to 10,594.57, and the

S&P 500

was gaining 6.11 points to 1229.24. The

Nasdaq Composite

was rising 8.71 points to 2173.10.

The benchmark 10-year Treasury bond rose 5/32, while its yield fell to 4.41%.

Still, economists note, there is little in the productivity numbers that would lead the central bank to deviate from its campaign to continue lifting short-term interest rates.

The year-over-year growth rate in unit labor costs is now at a solid 4.3%, the fastest rate in almost five years. As for the deceleration in compensation costs, it likely reflects the boost from stock options and bonuses in previous quarters, according to Ian Shepherdson, chief U.S. economist with High Frequency Economics.

"The Fed cannot afford to assume that compensation increases will remain at 3.5% indefinitely, given the tightening of the labor market," he wrote in a note. "With productivity likely to slow a bit further, there is little room for maneuver."