US: Employment Cost Index

Fri Oct 30 07:30:00 CDT 2015

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

The employment cost index came in on the hot side as expected, up 0.6 percent in the third quarter vs a record soft 0.2 percent in the second quarter. Outside of the second quarter, however, this index has been showing pressure with outsized 0.7 percent gains in the first quarter this year and the second and third quarters of last year that make for an average 0.6 percent pace over the past six quarters.

A look at components shows a strong 0.6 percent gain for wages & salaries in the latest quarter and a sizable 0.5 percent rise in benefits. Year-on-year, the ECI is unchanged at plus 2.0 percent with wages & salaries up 2.1 percent and benefits up 1.8 percent.

The latest quarter is on the high side and though it follows a very weak prior quarter, policy hawks can definitely cite a tangible upward trend in this series consistent with low levels of unemployment that may be forcing employers to raise wages and benefits to attract employees.

Market Consensus Before Announcement
The employment cost index is perhaps the single most underrated report on the calendar. It's importance among policy makers, who repeatedly cite its results, is not easily exaggerated. The second-quarter result of only plus 0.2 percent stands as the lowest in the 33-year history of the report, though a strong bounce back of 0.6 percent is expected for the third quarter. An unusually high reading, such as the top end estimate for plus 0.9 percent, could very well point to a December rate hike.

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.