Other data on Thursday showed worker productivity grew faster than expected in the second quarter, curbing gains in labor costs. The lack of labor market stress and contained wage pressures gave the Federal Reserve room to focus on the inflation fallout from the Middle East conflict, economists said. They said there were some signs that the adoption of artificial intelligence by businesses was raising productivity last quarter.
Still, economists said the U.S. central bank could still raise interest rates next month unless inflation improved.
In a separate report, the Labor Department's Bureau of Labor Statistics said nonfarm productivity, which measures hourly output per worker, increased at a 1.4% annualized rate last quarter after advancing at an upwardly revised 0.8% pace in the January-March quarter.
Economists had forecast productivity would grow at a 0.6% rate following a previously reported 0.3% pace of increase in the first quarter. Productivity grew at a 2.2% rate from a year ago. It has grown at a 2.1% rate from the fourth quarter of 2019 through the second quarter of 2026. The BLS said the labor share, the percentage of output that accrues to workers in the form of compensation, hit a record low 52.9% last quarter.
"Weak growth in the labor force likely is pushing companies to squeeze a bit more from their existing workforce," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.
Economists and policymakers are anticipating an AI buildout will boost productivity and curb inflation through a reduction in labor costs. Unit labor costs — the price of labor per single unit of output — increased at a 1.3% rate last quarter, after rising at a downwardly revised 1.3% pace in the first quarter.
Economists had expected unit labor costs to increase at a 2.1% rate last quarter after a previously reported 1.8% pace of growth in the January-March quarter. Labor costs grew at a 1.4% rate from a year ago. Hourly compensation increased at a 2.7% rate last quarter and grew at a 3.7% pace from a year ago.
"The Fed will take some welcome comfort from continued solid productivity gains and mild increases in unit labor costs," said Sal Guatieri, a senior economist at BMO Capital Markets. "Still, the risk of a September rate hike will remain elevated unless the July and August CPI reports show some further easing in core inflation."
SPY•
