US: Employment Cost Index

Wed Jan 31 07:30:00 CST 2018

Consensus Consensus Range Actual Previous
ECI - Q/Q change 0.6% 0.4% to 0.9% 0.6% 0.7%
ECI - Y/Y change 2.6% 2.5%

Wage costs and benefit costs eased off in the fourth quarter but the trend remains significantly firm. The employment index rose an as-expected 0.6 percent in the fourth quarter which is down 1 tenth from the third quarter -- yet the year-on-year rate continues to move higher, up 1 tenth to 2.6 percent. This rate was last matched in first-quarter 2015 and is otherwise the highest of the post-2008 expansion.

The breakdown between the wages & salaries component and the benefits component show similar pressure. This report won't raise any red flags at today's FOMC meeting but it will certainly be cited as a further indication of tightness in the labor market, conditions that could be pointing to a future inflationary flashpoint for wages.

Market Consensus Before Announcement
Another quarter of emerging wage pressures is the expectation for the fourth-quarter employment cost index where forecasters are calling for a 0.6 percent rise. The ECI jumped 0.7 percent in the third quarter for a year-on-year 2.5 percent, both near the highest rates of the expansion. Pressures in the third-quarter report were evenly split between wages and benefits.

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.