US DATA: Softer-Than-Expected Hourly Compensation Restrains ULCs At End-24 (1/2)

Unit labor costs were a little softer than expected at the end of last year, with the longer-term trend in productivity still broadly consistent with the Fed's general view expressed by Chair Powell in January: "the labor market is not a source of significant inflationary pressures".

• Unit labor costs rose by less than had been expected in Q4 2024, with the 3.0% Q/Q SA annualized rise (3.4% survey) showing stronger sequential unit cost pressures but from a lower base (Q3 rev down to 0.5% from 0.8%). That marks a 3-quarter high on both a Q/Q ann. and Y/Y (2.7%) basis. For 2024 as a whole, ULCs did pick up from 2.1% in the prior year, but this still represented disinflationary progress versus the figures printed in the pandemic (Q4 Y/Ys: 4.0% 2020, 3.7% 2021, 3.8% 2022).
• The nonfarm productivity reading for Q4 did not surprise, with a slowdown to 1.2% Q/Q ann., exactly as expected (2.3% prior rev up 0.1pp) which as a mirror image of ULCs was a 3-quarter low. Productivity growth has clearly slowed since a recent peak of 2.7-2.8% Y/Y in Q3 2023 through Q1 2024, to 2.1% in Q2 2024, 2.1% in Q3 2024 and now 1.6% (7-quarter low) in Q4 2024.
• But absent a further decline, the broader picture suggests productivity continues to rise at a sufficient pace versus labor costs to get inflation to 2%.
• The calculation of unit labor costs is the ratio of hourly compensation to labor productivity: in Q4, hourly compensation rose 4.2% Q/Q SA ann., and deflating by 1.2% productivity growth leaves the aforementioned 3.0% ULC reading.
• This implies that the hourly compensation print was lower than consensus had expected in the quarter, given productivity was in line.