The US worker productivity grew at a slower pace than the government initially estimated in the first quarter, driving up labor costs and strengthening concerns about inflation. The US Labor Department has reported that the productivity in the non-farm business sector grew at an annual rate of 1.0 percent in the first quarter of 2007, compared from a 2.1 percent pace in the last quarter of previous year. The department also reported that the labor costs rose at a 1.8 percent pace, against 0.6 percent rate anticipated earlier by the government. The recent activities that steered labor costs up have sent another inflationary warning shot at increasingly nervous financial markets.
After rising nearly uninterruptedly for three months, the stock market tumbled for a second successive day following fears that inflation is not settling down enough to satisfy the Federal Reserve. In fact, investors seemed to worry over uncertainties that not only that interest rates might remain where they are at present, but that the Fed could lift them even higher. Investors appeared to have become increasingly confident in recent days that one of the most powerful drivers of equity market growth, Fed interest-rate cut, is off the table for at least the rest of the year.
Growing labor operating cost, which account for almost two-thirds of the cost of producing a good or service, make it more prominent that businesses will increase prices. The figures released in recent days, along with signs that growth is recovering, has made it least probable that the Federal Reserve will lower interest rates this year. Slower productivity growth and faster increases in labor costs will in all probability augment uncertainties regarding wage-inflation risks. And for the Federal Reserve labor costs are one of the most crucial reasons behind their perception on inflation risks.
Fed Governor Randall Kroszner had recently stated that the fourth- quarter economic slowdown will ‘prove transitory,’ while a low unemployment rate threatens to add fuel to inflation. The jobless rate was at 4.5 percent in the last two months after touching a five- year low of 4.4 percent in March. In the meanwhile, Fed Chairman Ben S. Bernanke has said that while the housing slump is likely to last longer than earlier estimated, it has not spread out into other sections of the economy and he maintained a forecast for ‘moderate’ growth rate.
On the labor outlook, US employers have already announced plans in May to cast off 71,115 jobs, up 32 percent against May 2006 when job cuts reached 53,716. It also marked the second successive month in which job cuts increased from the same period a year ago. Even now, year to date, the pace of job reduction remains below last year’s level, but the gap is speedily narrowing.
