Thursday, April 30, 2009

U.S. First-Quarter Labor Costs Rise Least on Record

Employment expenses in the U.S. rose 0.3 percent in the first quarter, less than expected and the smallest gain on record, a sign the worst recession in at least half a century is restraining wages and benefits.

The increase in the employment cost index compares with a 0.6 percent gain in the last three months of 2008, the Labor Department said today in Washington. In the last 12 months, costs were up 2.1 percent, after a 2.6 percent year-over-year gain in the previous quarter.

Labor costs, which account for about two-thirds of company expenses, are likely to stay contained as the global downturn forces businesses to trim workers and benefits. Federal Reserve policy makers yesterday said while the economy’s pace of contraction may be slowing, conditions will be weak for some time and inflation will “remain subdued.”

“It’s reflective of just how much wages are under pressure in this slackening labor market,” said Jonathan Basile, an economist at Credit Suisse Holdings USA in New York. “There really is no worry on labor costs” in terms of the inflation outlook, he said.

The index was estimated to rise 0.5 percent, according to the median forecast of 51 economists in a Bloomberg News survey. Estimates ranged from increases of 0.3 percent to 0.8 percent.

The first-quarter gain was the smallest since records began in 1982.

Jobless Claims

Labor also reported today that fewer Americans filed first- time applications for unemployment insurance last week, indicating the pace of job losses may be slowing, while the total number of people on benefits continues to break records.

Initial jobless claims decreased by 14,000 to a less-than- forecast 631,000 in the week that ended April 25, from a revised 645,000 the prior week. The number of people staying on jobless benefit rolls increased by 133,000 to 6.27 million, the 13th straight week the figure has set a record.

Gross domestic product fell at a 6.1 percent annual pace from January to March after contracting 6.3 percent in the last three months of 2008, figures showed yesterday. The economy has shrunk 3.3 percent since peaking in last year’s second quarter, making this the second-worst slump since the Great Depression. GDP shrank 3.8 percent during the 1957-58 contraction.

The employment cost gauge measures the cost to companies of wages, benefits and employer-paid taxes such as Social Security and Medicare.

Wages and Salaries

Wages and salaries, which account for about 70 percent of total employment costs, rose 0.3 percent, also the least on record. From a year earlier, these costs increased 2.2 percent.

Benefit costs, which include some bonuses, severance pay, health insurance and paid vacations, rose 0.5 percent from the previous quarter, the same as in the fourth quarter. In the last 12 months, benefit costs rose 2 percent.

Among private companies, total compensation costs increased 0.2 percent, the smallest gain since that measure began in June 1980, while for state and local government employees, compensation increased 0.8 percent.

A weak labor market will restrain inflation pressures from wages because employees have less room to negotiate higher salaries.

Government figures may show next week that April payrolls fell by 620,000, after a drop of 663,000 in March, according to the median forecast in a Bloomberg survey.

The U.S. has lost about 5.1 million jobs since the recession began in December 2007.

Fed Statement

Fed policy makers, who voted yesterday to hold interest rates close to zero, predicted that “economic activity is likely to remain weak for a time.”

Given increasing economic slack here and abroad, “inflation will remain subdued,” according to the statement released after the Fed’s two-day meeting in Washington. There are “some risks that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

Companies trying to limit labor expenses include Adobe Inc., the world’s biggest maker of graphic-design software, which said it will freeze pay this year as the recession crimps sales.

“Clearly, we aren’t going to have salary increases,” Chief Financial Officer Mark Garrett said in an interview this week. “The bonus plans and variable compensation plans will pay out less. We have set ourselves up for what we think we need to do -- from a costs perspective -- for the rest of this year.”