Wage costs rise more slowly in the U.S.

Employment costs rose at a slower pace in the third quarter compared with the prior three months, indicating workers have limited scope to bargain for higher wages as the U.S. economy struggles to pick up.

The employment cost index increased 0.4% following a 0.5% gain in the prior quarter, the Labor Department said today (Oct. 31). Business activity unexpectedly contracted for a second month in October, another report showed.

A global economic slowdown and the prospect of more than $600 billion in automatic tax increases and government spending cuts – the so-called fiscal cliff – is encouraging some employers to hold the line on worker pay and other costs, according to economist Ryan Sweet. Limited wage growth makes it harder for households to step up purchases, which account for about 70% of the economy.

“There’s a lot of concerns for businesses,” said Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Pa., who correctly forecast October employment costs. “Not until we get beyond the fiscal cliff will we start to see manufacturing find its rhythm again.”

In a sign of more weakness in the global economy, a report from the European Union’s statistics office showed joblessness in the euro area climbed to a record in September. Unemployment in the 17-nation region rose to 11.6% from 11.5% in August.

A slowing in Europe may be taking a toll on American manufacturers. A gauge from the MNI Chicago Report rose to 49.9 from 49.7 in September. A reading of 50 is the dividing line between expansion and contraction. The median estimate of 54 economists surveyed by Bloomberg was 51.

The group’s gauge of new orders rose to 50.6 from 47.4. A measure of employment declined to 50.3, the weakest since December 2009, from 52. The production index fell to 51.8 from 55.4 in September, today’s report showed.

“There’s just a great deal of uncertainty and there’s not a lot of demand,” Stephen Roell, president and chief executive officer of Johnson Controls Inc., an automotive and building supplier in Milwaukee, Wis., said on an Oct. 30 earnings call. “I mean, there’s not a lot of growth in the underlying economy.”

Businesses remain concerned about the package of tax increases and government spending cuts that will begin to take effect in January unless Congress acts.

The economy and labor market are the central issues in the presidential campaign, with less than a week before Americans head to the polls. The outcome of the Nov. 6 election is too close to call, with President Barack Obama and Republican challenger Mitt Romney in a tight race in a handful of swing states.

The Labor Department’s report showed wages for all employees climbed 0.3%, while benefit costs advanced 0.8%.

The gain in wages and salaries, which account for about 70% of total employment costs, was the smallest this year. Private wages climbed 0.4%, the same as the second quarter. Pay for state and local government workers advanced 0.2%, the least in a year.

Wages of all employees increased 1.7% from the same quarter last year. Benefit costs for all workers, which include some bonuses, severance pay, health insurance and paid vacations, rose 0.8%, the biggest gain since the second quarter of 2011. Compared with the same three months in 2011, benefit expenses were up 2.6%.

Company costs for health benefits increased 3% in the third quarter from the same period last year.

Further gains in income may be needed to sustain recent gains in household purchases. Consumer spending climbed in September at a faster pace than the worker pay.

The 0.8% gain in September spending was the most since February, Commerce Department data showed earlier this week. With incomes rising 0.4%, the saving rate dropped to 3.3%, the lowest since November.

An economy growing at a 2% pace may not be strong enough to encourage companies to hire. The Labor Department on Nov. 2 is forecast to report a 125,000 increase in October payrolls after 114,000 a month earlier, according to the median estimate in a Bloomberg survey. The jobless rate probably climbed to 7.9% from a three-year low of 7.8%.

Federal Reserve policy makers last week pledged to continue to buy assets and pump money into the economy until the jobless rate falls.

“Growth in employment has been slow, and the unemployment rate remains elevated,” Fed policy makers said in an Oct. 24 statement. “Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.”