US: Employment Cost Index

Fri Jul 31 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
ECI - Q/Q change 0.6% 0.5% to 0.9% 0.2% 0.7% 0.7%
ECI - Y/Y change 2.0% 2.6% 2.6%

In a shocking result, the employment cost index rose only 0.2 percent in the second quarter which is far below expectations and the lowest result in the 33-year history of the report. Year-on-year, the ECI fell 6 tenths to plus 2.0 percent which is among the lowest readings on record. The record low for this reading is plus 1.4 percent back in the early recovery days of 2009 when, apparently unlike today, there was enormous slack in the labor market.

The report's two components both fell back sharply with wages & salaries moving down to plus 0.2 percent from 0.7 percent in the first quarter and benefits at plus 0.1 percent vs the first quarter's plus 0.6 percent. Year-on-year, wages & salaries are up 2.1 percent with benefits below 2.0 percent at 1.8 percent.

This report, which is very closely watched by policy makers, may very well unsettle the outlook for the Fed's rate liftoff, pushing expectations to the December FOMC from the September FOMC. For the inflation outlook, wage pressures are supposed to be an offset to still weak commodity prices. The Fed's 2 percent goal for core inflation is looking elusive.

Market Consensus Before Announcement
The employment cost index has been running hot and a sharp gain of 0.6 percent is expected for the second-quarter. Strong gains in this report would make news at the Fed and would likely be cited in short order by policy makers, especially the hawks.

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.