Thursday, 7 September 2006

US labour costs rising, but inflation and growth outlook mixed elsewhere

Inflation fears were reignited yesterday after US labour costs were reported to be rising faster than previously thought. From Reuters:

The Labor Department's report contained revisions to first-quarter data showing hourly worker compensation shot up by 13.7 percent, well ahead of the previously reported 6.9 percent gain.

In the second quarter, compensation rose at a more subdued, but still strong, 6.6 percent pace...

The gains in worker compensation helped push unit labor costs...up 5 percent over the past year, the largest increase since a matching rise in the period ended in the third quarter of 2000.

In the first quarter, unit labor costs rose by 9 percent and they rose 4.9 percent in the April-June period, well ahead of the 3.8 percent gain economists had expected...

The Labor Department said U.S. productivity has risen 2.5 percent over the past year, a solid increase in line with the gains seen since the mid-1990s.

The Fed's Beige Book report painted a mixed picture on growth and inflation.

The Fed said the overall economy expanded from mid-July to late August, but five of its 12 districts reported slowing growth as residential construction slackened and energy costs rose...

[T]he Fed said there were widespread price increases for energy, metals and other commodities, but these did not appear to be triggering more general consumer inflation.

But growth in the services sector is holding up.

The Institute for Supply Management's services index rose to 57 in August from 54.8 in July. The median forecast of Wall Street economists was for an increase to 55.

And even the housing sector had a piece of good news.

Separately, the Mortgage Bankers Association said applications for U.S. home mortgages edged higher last week as lower loan rates helped encourage more home purchases for the first time since early August.

The picture is mixed in Europe, with the Bloomberg retail PMI falling to 52.3 in August from 53.8 in July, but German factory orders rising 1.8 percent in July.

In the UK, industrial and manufacturing output rose 0.2 percent in July while shop prices rose 1.4 percent in August from a year ago, but annual take-home pay growth slowed to 4.7 percent in August and sentiment among consumer services firms deteriorated sharply.

Under the circumstances, and with the IMF warning of the risk of "sharply slower growth", watching and waiting may be the more prudent action for central banks. Apparently, the Bank of Canada and the Reserve Bank of Australia think so, choosing to leave rates unchanged yesterday, as reported by Bloomberg and The Sydney Morning Herald respectively. Weaker than expected second quarter GDP growth in the case of the latter adds to the cautionary mood.

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