Incomes in the U.S. rose in the first quarter by the least on record, benefiting company earnings even as the worst recession in at least half a century batters workers, economists said.
The 0.3 percent gain in wages and salaries, which account for about 70 percent of total employment costs, was the smallest since the government began tracking them in 1982, the Labor Department said Thursday in Washington. Private compensation also rose by the least since that gauge started in 1980, and wages for workers in financial services fell by the most in a decade.
“The upside of recessions, at least for businesses, is that labor costs are well contained,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pa. “That should help keep profits from declining too rapidly and for some firms may allow for earnings to actually grow.”
Lower labor costs, which account for about two-thirds of company expenses, may help explain why profits didn’t fall even more as the economy shrank a worse-than-forecast 6.1 percent last quarter. Some 215 members of the Standard & Poor’s 500 Stock Index topped analysts’ estimates, or 70 percent of the 309 companies that have reported so far.
Compensation including wages and benefits for private industry workers increased 0.2 percent last quarter from the prior three months. Wages and salaries in financial services fell 1 percent, the first drop since 2005 and the biggest decline since 1999.
For some economists, the deceleration in employment costs raises the risk of deflation, or a prolonged decline in prices that is harmful to the economy. Slowing incomes may set back the nascent recovery in consumer spending, prompting companies to pass along the lower labor costs to customers by cutting prices.
This is “pretty powerful evidence that the build-up of slack in the labor market is having a meaningful impact on wage and benefit trends,” David Greenlaw, Morgan Stanley’s chief financial economist in New York, wrote in a note Thursday. “This raises the risk of outright deflation at some point down the road.” Unemployment may “continue to move higher, putting even more downward pressure on employment costs,” he said.
The Federal Reserve on Wednesday said in a statement that while “inflation will remain subdued,” there are “some risks that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”
Commerce Department figures Thursday showed consumer spending fell more than forecast at the end of the first quarter as mounting job losses threatened to weigh on a projected economic recovery later this year. Purchases decreased 0.2 percent in March, the first decline in 2009. The price gauge tied to spending patterns rose from a year ago by the least since 1961, a sign inflation is cooling.