9:15 am ET
Jan 29, 2015
Waiting for Wage Growth? Everyone Is Watching the Employment Cost Index
Jeffrey Sparshott
"By many measures, U.S. wages have been stagnant since the recession ended. It’s a sign the economy isn’t yet at full strength and another reason for the
Federal Reserve to move cautiously in raising interest rates.
"That’s why all eyes are on the employment cost index, a measure of wage and benefit expenditures due out Friday from the
Labor Department. Typically, the ECI would be overshadowed by the first estimate of fourth-quarter gross domestic product, a broad measure of overall economic output, due out at exactly the same time from the
Commerce Department.
"But depending on the story the numbers tell, the focus may shift.
“The ECI could be more important than GDP in the collective mind of the financial markets,”
Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said in a note to clients. “For the Fed to raise rates, strong growth alone is not enough.”
"Instead, there needs to be evidence that inflation is trending back toward the Fed’s 2% target, Mr. LaVorgna said. Wages are one leading indicator.
"For now, inflation is weak and
may be getting weaker. There aren’t yet any signs of wage pressures beyond a handful of areas, though the Fed on Wednesday highlighted strong job gains and a lower unemployment rate.
“On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish,” the central bank said after a two-day policy meeting where officials agreed to
keep short-term rates near zero.
"Will wages remain a missing piece of the puzzle? Most recently, a separate Labor Department report showed earnings
going into reverse in December despite solid hiring. Average hourly earnings for private-sector workers fell 5 cents, or 0.2%, to $24.57 from the prior month. From a year earlier, hourly earnings were up a mere 1.7%, barely ahead of inflation.
"One theory for weak income gains: A wide swath of Americans are underemployed or on the sidelines of the labor market, serving as a large pool of available labor. The share of Americans working or looking for work in December fell to 62.7%, matching the lowest level since 1978.
"But some economists believe hourly earnings are a poor indicator of wage trends. The measure lumps all occupations together, so it would be muted if, for example, the economy were adding more low-paying jobs than high-paying jobs.
"The ECI, by comparison, is built with fixed weights for individual industries and occupations. While it’s still not perfect, it better controls for an economy that may be growing unevenly across sectors.
“Even a small pickup in wage gains is consistent with the labor market starting to get tight, which is a very different signal than that from the latest hourly earnings data,” said
Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “Needless to say, Friday’s ECI report could be quite important for the Fed outlook.”
"Economists surveyed by The Wall Street Journal are forecasting the ECI rose 0.6% in the fourth quarter from the prior quarter. The index advanced 0.7% in both the second and third quarters.
"Ian Shepherdson, chief economist at Pantheon Macroeconomics, notes that if ECI private-sector wages and salaries maintain the same pace as in the third quarter, the year-over-year gain would hit 2.4%, the highest level in six years.
“The idea that the mass of people who have left the labor force, the large numbers of involuntary part-time workers and the still-elevated number of long-term unemployed people will suppress wage gains for the foreseeable future would become much less plausible,” Mr. Shepherdson said.
http://blogs.wsj.com/economics/2015...eryone-is-watching-the-employment-cost-index/
