A Non-High Pressure Labor Market

John Berry is now more optimistic about the state of the economy than he was a week ago:

Door Is Open for the Fed to Pause at 5 Percent: John M. Berry 2006-06-02 00:03 (New York): For Federal Reserve officials... a key piece of worrisome inflation-related data disappeared yesterday in a flurry of revisions to productivity and cost figures. This important change... leaves the door open for the Fed to keep its target for the overnight lending rate at the June 28-29 meeting at the current 5 percent.... According to the May [FOMC] minutes, officials noted that ``alternative measures of labor compensation provided divergent readings.'' After yesterday's revisions, there's no divergence. A jump in unit labor costs at a 3 percent annual rate in the fourth quarter of last year at non-farm businesses turned into a decline at a 0.6 percent rate in the new figures from the Labor Department. Similarly, the first quarter's increase at a 2.5 percent rate was toned down to a 1.6 percent rate....

The changes left compensation only 2.8 percent higher than it was in March 2005 and unit labor costs up only 0.3 percent over the same 12 months -- hardly fuel for a sustained increase in inflation.... [W]hatever is happening on the inflation front, pressure on businesses to raise prices because of higher labor costs isn't part of it....

[O]fficials understandably are concerned about inflation, which is running at or perhaps just a bit above the top of the range with which they are comfortable, as several FOMC members said at there May meeting, according to the minutes. On the other hand, the officials also know that inflation typically peaks some months after economic growth slows. As the minutes said, ``It seemed most likely that, with modest further policy action, including a 25 basis point firming today, growth in activity would moderate gradually over coming quarters, pressures on resources would remain limited, and core inflation would stay close to levels experiences over the past year.''

So far there is no reason to think that conclusion is wrong.

Three percent productivity growth. Zero percent real wage growth. Not an economy near full employment feeling rising inflationary pressures from labor.