US: Employment Cost Index

January 31, 2017 07:30 CST

Consensus Consensus Range Actual Previous
ECI - Q/Q change 0.6% 0.6% to 0.8% 0.5% 0.6%
ECI - Y/Y change 2.2% 2.3%

Employers are getting a break as benefit costs continue to slow, helping to hold down the fourth-quarter employment cost index to a lower-than-expected 0.5 percent quarter-to-quarter gain. Benefit costs rose only 0.4 percent in the quarter which is the second lowest showing going back to third-quarter 2011. Year-on-year, total costs rose 2.2 percent, down 1 tenth from the third quarter, with benefit costs down 2 tenths to 2.1 percent.

But the bulk of costs that employers pay, about 70 percent, are wages & salaries where the fourth-quarter gain is sizable at 0.5 percent. This year-on-year rate is at 2.3 percent for, however, a 1 tenth decline.

Employers aren't getting as squeezed by benefits as they had in 2014 when related costs were approaching 3 percent. And though wages & salaries are up, there's no indication that an inflationary flashpoint is at hand. Today's report is not likely to heat up the inflation discussion at this week's FOMC meeting.

Market Consensus Before Announcement
The employment cost index has been showing pressure, rising 0.6 percent in each of the prior three quarters with forecasters seeing yet another 0.6 percent rise in the fourth quarter. The year-on-year rate has been moving higher, at plus 2.3 percent the last two reports. The two components -- wages & salaries and benefits -- have been showing similar levels of pressure. Putting aside prospects of job expansion under the new administration, the risk exists that tight conditions in the labor market are already raising employer costs.

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.