U.S. Labor Costs Accelerate on Tightening Job Market

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U.S. Labor Costs Accelerate on Tightening Job MarketU.S. labor costs surged the most in over 5 ½ years in the three months through June while a measure of job market trends plunged to its lowest level in eight years last week, boosting the overall economic picture.

The Employment Cost Index, which is the broadest index of the labor costs, grew 0.7 percent. This was the biggest advance since the July-September quarter of 2008 and compares against the 0.3 percent growth in the first quarter.

The index is one of the labor market measures closely tracked by the Federal Reserve Chair Janet Yellen in order to influence the timing of the interest rates. However, Fed policymakers said on Wednesday that while the labor market has improved, some slack still remains.

Economists also cautioned against taking the increase in the employment cost index too seriously, but said that the improving job market means wages may start accelerating substantially.

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“If the unemployment rate keeps declining, compensation pressures simply have to increase. Most members of the Federal Reserve appear to believe it will be a lot later and not very rapidly but I am not that sure,” Joel Naroff, a Holland, Pennsylvania-based chief economist at Naroff Economics Advisors told Reuters.

Labor costs increased 2.0 percent in the 12 months through June, compared with 1.8 percent in the year through March. Salaries and wages, which compose 70 percent of all employment expenses, rose 0.6 percent in the April-June quarter, the most since the July-September quarter of 2008. The salaries and wages had earlier increased 0.3 percent in the first quarter.

Meanwhile, the Labor Department announced that the four-week average of fresh applications for jobless benefits plunged 3,500 to 297,250 last week. This was the lowest level since April 2006, indicating that the labor market is well on its way to reaching the pre-recession peaks. To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Jonathan Millet at john@forexminute.com