Labor Cost Growth Is Gradually Slowing

Economics Group of Wells Fargo Bank, N.A. Summary The Employment Cost Index (ECI) increased 1.0% quarter-over-quarter in Q2, the smallest increase in two years. The Fed’s preferred measure of labor cost growth is still running faster than it was before the pandemic and above what would be consistent with 2% inflation over the medium term. That said, compensation growth appears to have turned a corner as supply and demand in the labor market have come into better balance. The FOMC probably will want to see the recent trend sustained before it feels confident that inflation is firmly on its way back to 2%, but today’s report is overall encouraging for achieving this goal. ECI Growth Hits Two-Year Low The Employment Cost Index increased 1.0% (not annualized) in the second quarter, a tenth below the Bloomberg consensus forecast. Both the year-over-year and quarter-over-quarter growth rates declined compared to Q1, an encouraging sign that the momentum in labor cost growth is slowing. The ECI provides an encompassing view of labor cost pressures as it includes private and public sector workers as well as the benefit portion of compensation (about 30% of the total). Moreover, the ECI controls for compositional shifts in the workforce. For example, the higher frequency and more timely average hourly earnings data can be influenced by big moves in employment for workers at either end of the income distribution. As an extreme example, in April 2020 average hourly earnings “increased” a series record 4.2% in a single month amid huge COVID-induced layoffs that were more heavily concentrated in lower-paying industries such as leisure & hospitality. Given the ECI’s desirable features as a dataset, it is generally viewed as the Fed’s preferred measure of labor compensation costs. READ FULL ARTICLE >>