US: Employment Cost Index

Thu Apr 30 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
ECI - Q/Q change 0.6% 0.5% to 1.4% 0.7% 0.6% 0.5%
ECI - Y/Y change 2.6% 2.2% 2.2%

Compensation costs, which are scrutinized for pressure and considered strictly unwanted by the Federal Reserve, are moving higher. The employment cost index rose 0.7 percent in the first quarter vs a revised 0.5 percent in the fourth quarter. Year-on-year, the index is up 2.6 percent which significantly exceeds the fourth-quarter rate of 2.2 percent and, very importantly, significantly exceeds the Fed's general inflation limit of 2.0 percent.

The first-quarter gain is split evenly between wages & salaries, up 0.7 percent on the quarter, and benefits, up 0.6 percent. Year-on-year, wages & salaries are up 2.6 percent with benefits up 2.7 percent.

The Fed is ready now to raise interest rates at a drop of the hat and today's ECI, though not widely followed by the public, is very closely followed by policy makers. Yesterday's FOMC statement described compensation inflation as remaining low, but these numbers may not fit with that description.

Market Consensus Before Announcement
The employment cost index 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.

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.