US: Employment Cost Index

Fri Jan 30 07:30:00 CST 2015

Consensus Consensus Range Actual Previous Revised
ECI - Q/Q change 0.5% 0.3% to 0.9% 0.6% 0.7% 0.7%
ECI - Y/Y change 2.2% 2.2% 2.2%

Compensation costs held at a high rate in the third quarter, at a quarter-to-quarter plus 0.6 percent but down 1 tick from 0.7 percent gains in the prior two quarters. Year-on-year, the fourth-quarter rate held at the third-quarter rate of plus 2.2 percent.

Pressure in recent quarters has been about evenly split between the wages & salaries component and the benefits components, up 0.5 percent and 0.6 percent respectively in the latest quarter. Year-on-year, however, benefits are higher at plus 2.6 percent, which matches second-quarter last year as a recent high, vs plus 2.1 percent for wages & salaries.

Unlike average hourly earnings, which came in at only 1.7 percent year-on-year in the December employment report, this report has been showing some inflationary pressures tied to employment, a risk that is certain to register with the hawks at the Federal Reserve.

Market Consensus Before Announcement
The employment cost index for the third jumped 0.7 percent for the second straight quarter (seasonally adjusted). These are the two largest increases of the recovery, going back to 2008. The wages & salaries component showed the most pressure in the report, up 0.8 percent in the quarter versus an already large 0.6 percent gain in the second quarter. The latest gain was the largest since 2008. The benefits component rose 0.6 percent, down from a 1.0 percent spike in the second quarter.

A measure of total employee compensation costs, including wages and salaries as well as benefits. The employment cost index (ECI) is the broadest measure of labor costs.

The employment cost index is an easy way to evaluate wage trends and the risk of wage inflation. Wage inflation is high on the Federal Reserve's enemy list. Fed officials are always on the lookout for the prospects of inflationary pressures. Wage pressures tend to percolate when economic activity is booming and the demand for labor is rising rapidly. During economic downturns, wage pressures tend to be subdued because labor demand is down.

By tracking labor costs, investors can gain a sense of whether businesses will feel the need to raise prices. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked the employment cost index and adjusted their portfolios to anticipate these events.