Q3 ECI: Labor Cost Growth Slowing Gradually

Source: Economics Group of Wells Fargo Bank, N.A. Summary The 1.1% rise in the Employment Cost Index in Q3 was a touch stronger than expected but showed labor cost pressures continue to slowly ease on trend. With the ECI still running north of 4%, labor cost growth remains too high to be consistent with the Fed’s 2% inflation target. However, with demand and supply for labor gradually coming back into balance, we expect growth in compensation costs to slow further ahead, with the recent moderation enough to keep the Fed from additional rate increases. Pickup in Public Sector Compensation Drives Slight Beat in Q3 ECI The slowly improving balance between supply and demand for labor is helping to gradually reduce cost pressures stemming from the labor market. The Employment Cost Index rose 1.1% in the third quarter, a touch higher than the consensus and our own expectation for a 1.0% gain. Yet the “low” 1.1% reading (1.07% before rounding) was enough to nudge down the year-over-year rate to nearly a two-year low of 4.3% (not seasonally adjusted). The ECI is the preferred gauge of labor costs among the FOMC and most economists as it provides a more comprehensive look at compensation growth. Compared to the more timely average hourly earnings data from the monthly jobs report, the ECI includes public sector workers and benefit costs, in addition to controlling for compositional shifts in jobs that can at times muddy the trend in pay pressures. READ FULL ARTICLE >>