US DATA: Slowest Y/Y ULC Growth In A Decade Gives Further Impetus For Fed Cut

The final release of Q2 productivity data showed an even bigger slowdown in unit labor costs (ULCs) than previously thought, with productivity growth estimates edging higher. Overall this is a report that provides some more impetus for the FOMC to start easing policy.

• ULC growth was revised down to 0.4% Q/Q SAAR, from 0.9% in the initial estimate and 3.8% in Q1. Productivity meanwhile picked up to 2.5% vs 2.3% initial and 0.4% prior. Put another way, output rose by 3.5% whereas hours worked rose just 1%; hourly compensation increased by 3%.
• This means that (on a seasonally adjusted basis) ULCs barely grew over the past year (0.3% Y/Y), as productivity posted solid gains (2.7%). The BLS notes that for ULCs, this was "the lowest rate since the fourth quarter of 2013, when the measure decreased 2.2 percent."
• The main consideration for the Fed here is that productivity growth is helping offset the inflationary impact of higher worker compensation. There is still a large gap in trend levels between the above-trend ULCs which jumped over 2021-23 while productivity slumped, as the low-productivity service economy came back online post-pandemic.
• The direction of travel is important here it's arguably the key to the Fed achieving a soft landing. Fed Gov Kugler, a labor economist, put it this way in June: "A third reason for my optimism about achieving 2 percent inflation is that I am also cautiously optimistic about productivity growth, which is a source of supply expansion that is likely to put downward pressure on inflation without slower economic growth".