Labor costs up in quarter

July 29, 2006|By BLOOMBERG NEWS

WASHINGTON -- U.S. labor costs rose more than expected in the second quarter, led by the biggest increase in wages in three years, the Labor Department reported yesterday.

The 0.9 percent rise in the employment cost index, the biggest since the first quarter 2005, followed a 0.6 percent gain the previous three months, the department said.

Over the past year, labor costs were up 3 percent.

Rising labor costs are another potential source of inflation as companies, already paying more for fuel, try to raise prices.

"Firms will try to preserve margins, and they will experiment with price increases," said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. "That will contribute to the upward creep in inflation."

The economy expanded at an annual rate of 2.5 percent last quarter, reflecting weaker consumer spending and the first decrease in purchases of business equipment since 2003, the Commerce Department said. Economists forecast a 3 percent growth rate in the second quarter.

Wages and salaries rose 0.9 percent in the second quarter, the most since the first three months of 2003, after rising 0.7 percent the previous three months. In the past 12 months, wages and salaries were up 2.8 percent, compared with a 2.7 percent first-quarter increase.

Benefit costs, which include bonuses, severance pay, health insurance and paid vacations, rose 0.8 percent last quarter, after a 0.5 percent gain from January through March. In the past 12 months, benefit costs increased 3.4 percent.

The Fed's report this week on regional economic activity said economic growth slowed in the past month, but consumer-price and wage increases were "modest" on balance.

Job markets "were tight in general and tightened a bit further in most areas," the Fed said, and workers' income gains were "moderate overall, with scattered indications of faster growth for some."

Policymakers next meet Aug. 8. Fed Chairman Ben S. Bernanke made a case last week for suspending interest-rate increases, as a moderation in growth will probably give way to smaller price increases.

Still, some companies haven't had much luck in curbing labor costs. Chicago-based Northern Trust Corp., a bank with $3.2 trillion in assets, said last week that its expenses grew 11 percent from a year earlier as compensation costs rose 12 percent.

Northern Trust noted higher performance-based pay, staffing and benefit costs for the increase. The company's work force expanded by 4 percent in the past year.

It still managed a 12 percent increase in earnings, as new contracts and a surge in foreign-exchange trading fees pushed revenue to a record.

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