We, therefore, have to look at unit labor costs. In the first two quarters of this year, they were up 2.1 percent from the same period of last year – some acceleration from an average 0.9 percent increase observed in the previous two years.
By contrast, the employment cost index is showing a trendless 1.92 percent quarterly year-on-year increase between the second quarter of last year and (including) the second quarter of this year.
Clearly, none of these labor cost indicators should sound alarm bells at the Fed.
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That is also what the weak labor market data are telling us. The actual unemployment rate in August was nearly double the officially reported 6.1 percent -- once you add in 7.3 million of involuntary part-time workers (people who work part-time because they can't find a full-time job), and another 2.1 million people who have largely given up on job search and dropped out of the labor force. And there are 3 million people counted as the long-term unemployed – nearly one-third of all the persons officially registered as being out of work.
Again, this simple and robust evidence shows that there is no need for 19 indicators to see that the actual labor market slack in the United States remains quite large.
These few numbers, taken out of a report compiled and published by the U.S. Bureau of Labor Statistics (BLS), easily pass the specificity test because they correctly identify the problem we are trying to measure (i.e., the magnitude of the labor market slack). They will also pass the sensitivity test because they will show that the changing demand-supply relationships in U.S. labor markets are directly reflected in changing manpower costs.
You can see that by relating the above-cited increases in hourly compensations and unit labor costs to the fact that the unemployment rate and the number of unemployed have declined by 1.1 percentage points and 1.7 million people in the year to August.
Modest capacity pressures in product markets
The next question is: How does the current state of labor markets look in the context of demand-supply conditions (or capacity utilization rates) in manufacturing and service industries?
Both are showing a steady progress of the U.S. economy. The rate of capacity utilization in the U.S. manufacturing sector increased 1.7 percentage points to 79.2 percent in the year to July – a good number but still below the long-term average of 80.1 percent, and considerably below the cyclical highs of 85 percent observed in late 1990s.
The service sector is also doing well. The survey evidence for August indicates that service industries continued to register steady output gains, some excess supply (high inventories) and sharply falling prices.
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So, that's where we stand at the moment. To see where we might go from here requires a look at household incomes and credit conditions, the two key variables moving three-quarters of the U.S. economy (personal consumption and residential investments).
There has been a considerable improvement in both variables since the beginning of this year. The households' real disposable income increased 2.5 percent in the first half of the year from the year before – a good rebound from a 0.2 percent decline during 2013. The current households' savings rate of 5.1 percent is also a sign that steady consumer outlays can be sustained in the months ahead.