U.S. labor costs rose moderately in the second quarter as private sector wages grew at their slowest pace in three and a half years, suggesting inflation is on a downward trend. This development could support an interest rate cut in September. The Labor Department's report also indicated a rise in the number of people on jobless rolls to the highest level since late 2021, raising concerns about potential rapid labor market deterioration.
Federal Reserve Chair Jerome Powell acknowledged the changes in the labor market as part of a broader normalization process, though he noted the Fed is closely monitoring for any signs of significant downturns. Initial claims for state unemployment benefits increased by 14,000 to a seasonally adjusted 249,000 for the week ending July 27, the highest level since August last year. Economists had forecast 236,000 claims for the latest week.
Market Overview:
- U.S. labor costs rise moderately in Q2.
- Jobless claims reach highest level in nearly a year.
- Potential support for September interest rate cut.
Key Points:
- Private sector wages grow at slowest pace in 3.5 years.
- Unemployment benefits claims suggest labor market softening.
- Fed closely monitoring labor market conditions.
Looking Ahead:
- Potential for interest rate cuts if inflation continues to cool.
- Impact of labor market changes on broader economic outlook.
- Upcoming employment report to provide further insights.
Despite the increase in jobless claims, layoffs remain generally low, with the layoffs rate in June being the lowest in over two years. A separate report from Challenger, Gray & Christmas showed a 47% drop in planned job cuts by U.S.-based companies in July. However, the number of people receiving benefits after an initial week of aid increased to the highest level since November 2021. The government is expected to report a moderate increase in nonfarm payrolls for July, with the unemployment rate remaining at 4.1%.
The report also highlighted a positive trend in worker productivity, which increased at a 2.3% annualized rate in the second quarter. This is seen as encouraging for the broader inflation and economic outlook, as it suggests firms can control costs and protect margins without sacrificing talent. The increase in productivity, coupled with a slowdown in labor costs, supports the view that inflation is continuing to ease, providing a more favorable environment for economic growth.
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