US companies' labour costs rose at the fastest rate in five years during the three months to June, fuelling fears that the long period of non-inflationary growth may be nearing an end.
Unit labour costs - wages and related expenditures per unit of output - in all businesses except farming grew at a seasonally adjusted annual rate of 4.5 per cent in the second quarter.
Output growth slowed markedly while pay continued to accelerate, the US Labor Department reported yesterday.
The report, a revision to an earlier estimate, combined with cautionary remarks on interest rates by a governor of the US Federal Reserve, prompted a sell-off in financial markets. At lunchtime, the Dow Jones Industrial Average was down 161.16 points at 10,776.72. It recovered to closed down 94.67 at 10,843.21.
The Labor Department had previously estimated that unit labour costs rose at an annual rate of 3.8 per cent in the second quarter, but yesterday's revision revealed the performance was much worse.
It reflected a sharp downward revision to productivity growth in the second quarter. The already disappointing estimate of 1.3 per cent growth was revised to 0.6 per cent. For the past three years productivity has been rising at an annual rate of about 2 per cent, raising hopes the US had significantly improved its long-term economic performance.
While the deterioration was another hint that long-dormant inflationary pressures could be stirring, it was largely the result of the significant slowdown in overall growth in the second quarter.
Last week, the Commerce Department said gross domestic product rose at an annual rate of just 1.8 per cent in the three months to June, down sharply from the near 4 per cent growth rate of the past three years.
Signs are strong that output has bounced back from its relative weakness in the spring. There was more evidence of the early strength of third-quarter growth yesterday when the Commerce Department reported new orders to manufacturers grew by 2.1 per cent in July, the fastest monthly increase this year.
