US: Employment Cost Index

Tue Oct 31 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous
ECI - Q/Q change 0.7% 0.6% to 0.8% 0.7% 0.5%
ECI - Y/Y change 2.5% 2.4%

Wage pressures are emerging, led by average hourly earnings in the monthly employment report and also including the employment cost index which rose 0.7 percent in the third quarter in what is the third strongest showing of the expansion. The year-on-year rate, up 1 tenth at 2.5 percent, is the second strongest showing.

Pressures are evenly split between compensation, which makes up the bulk of employer costs, and benefits at respective quarterly increases of 0.7 and 0.8 percent and year-on-year increases of 2.5 and 2.4 percent.

With the unemployment rate at 4.2 percent, there's not much slack, if any at all, left in the labor market which points to a possible flashpoint for wage inflation. Today's report is certain to be discussed at this week's FOMC meeting with wage inflation a possible topic for the FOMC statement.

Market Consensus Before Announcement
Second-quarter wage and benefit costs slowed to 0.5 percent but they didn't completely offset the first quarter's 0.8 percent surge. Expectations for the third quarter's employment cost index is an imposing 0.7 percent quarter-to-quarter gain. The low rate of unemployment, at only 4.2 percent, is a warning signal for rising 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.