By Lucia Mutikani
WASHINGTON, Dec 6 (Reuters) - U.S. unit labor costs were much weaker than initially thought in the third-quarter amid robust worker productivity, providing a boost to the Federal Reserve's fight against inflation.
The inflation outlook was further brightened by other data on Wednesday showing a moderation in wage growth in November. The reports followed news on Tuesday that job openings dropped to more than a 2-1/2-year low in October.
They strengthened financial market expectations that the U.S. central bank was done tightening monetary policy and could pivot to cutting rates as early as March.
"The decline in labor costs points to a further slowdown in services inflation, the last front in the Fed's effort to bring inflation back to 2%," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York. "Our baseline forecast assumes that rate cuts don't start until third quarter of next year, although the risk may be growing that the Fed starts sooner."
Unit labor costs - the price of labor per single unit of output - fell at a 1.2% annualized rate in the third quarter, the Labor Department's Bureau of Labor Statistics (BLS) said, revised down from the previously reported 0.8% pace of decline. That was the first drop since the fourth quarter of 2022.
Economists polled by Reuters had expected that the decrease in unit labor costs would be revised down to a 0.9% rate.
Growth in unit labor costs was lowered to a 2.6% rate in the second quarter from the previously reported 3.2%. Unit labor costs rose at a 1.6% rate from a year ago, the smallest year-on-year increase since the second quarter of 2021.
The moderate annual labor costs bode well for the Fed's efforts to lower inflation to its 2% target. The central bank is expected to leave interest rates unchanged next Wednesday. It has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range, since March 2022.
Nonfarm productivity, which measures hourly output per worker, increased at a 5.2% rate last quarter, revised up from the previously reported 4.7% and the quickest since the third quarter of 2020.
The upgrade was telegraphed last week by revisions to gross domestic product data, which showed the economy growing at a 5.2% rate in the July-September quarter, instead of the previously reported 4.9% pace.
Productivity grew at an unrevised 3.6% pace in the second quarter. It expanded at a 2.4% pace from a year ago, revised up from the previously estimated 2.2% rate.
Though hourly compensation rose at an unrevised 3.9% pace last quarter, it increased at a downwardly revised 4.0% rate from a year ago. Annual compensation was previously reported to have risen at a 4.2% rate.
Stocks on Wall Street opened higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
WAGE GROWTH COOLING
Slowing wage pressures were underscored by the ADP National Employment Report, which showed pay increases for workers remaining in their jobs at 5.6% year-on-year in November, the smallest gain since September 2021.
Wages for people changing jobs rose 8.3%, smallest year-on-year increase since June 2021.
"The softer turn of recent labor market releases reduces the risk that inflation pressures revive due to wage-price issues, making it easier for the Fed to pivot to rate cuts in 2024," said Bill Adams, chief economist at Comerica Bank in Dallas.
The ADP report also showed private payrolls increased by 103,000 jobs in November after rising 106,000 in October. Economists had forecast private payrolls rising 130,000.
The ADP report, jointly developed with the Stanford Digital Economy Lab, was published ahead of the release on Friday of the BLS' more comprehensive and closely watched employment report.
It has, however, been a poor gauge for predicting the private payrolls in the employment report.
The labor market is steadily slowing in the aftermath of rate hikes. The government reported on Tuesday job openings fell to more than a 2-1/2-year low of 8.733 million in October. There were 1.34 vacancies for every unemployed person, the lowest since August 2021.
According to a Reuters survey of economists, the employment report is expected to show private payrolls increased by 153,000 jobs in November as about 33,000 striking United Auto Workers union members returned to work. Private payrolls rose 99,000 in October. Total nonfarm payrolls are estimated to have increased by 180,000 in November after rising 150,000 in the prior month.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)