- INDICATOR: Third Quarter Employment Cost Index and September Income and Spending
- KEY DATA: ECI: 0.6%; Wages: 0.6%; Benefits: 0.5%/ Real Consumption: +0.2%; Real Disposable Income: +0.2%; Inflation: -0.1%; Excluding Food and Energy: +0.1%
- IN A NUTSHELL: “The labor market may be tight but firms appear to be in no great hurry to raise compensation.”
WHAT IT MEANS:
If inflation is headache number one for the Fed, then the plop, plop, fizz, fizz relief would be a rise in employment costs. Unfortunately, pay may be going up, but not rapidly. Employee compensation gains rebounded from the strangely tame second quarter, with both benefits and salaries rising decently.
Wages and salaries were up solidly in both manufacturing and services with only the financial sector holding the line. Interestingly, union wage growth lagged nonunion pay, though over the year the increases were equivalent. Oddly, hotel and restaurant workers had the smallest increase, which seems to go against other data. On the benefits side, the rise was restrained by minimal gains in manufacturing. Benefit increases were nothing great and once again, union workers were left in the dust.
So much for unions having such great power that their wages and benefits are being artificially increased. Where the stereotype does hold, at least to some extent, is with government workers, whose benefits are rising faster than in the private sector. Government worker wage gains are lagging, however.
The September income and spending numbers provide some insight into the third quarter employment cost and GDP data, which were released yesterday. There was strong consumption during the summer quarter, but it didn’t happen in September. Households spending was somewhat restrained during the month compared to July and August.
Similarly, personal income increased at a disappointing rate. The eye-opening number was the decline in wages and salaries, led by a sharp cut back in manufacturing. The sector has been retrenching and reduced payrolls means lower total wages. But even in services, the numbers were disappointing: Wage and salaries increased minimally. The 4.7% savings rate was generally in line with what we have been seeing this year. As for inflation, it was more of the same: A modest decline in total consumer costs and a small increase excluding food and energy.
MARKETS AND FED POLICY IMPLICATIONS:
Employers may not be able to fill their open positions but they steadfastly refuse to bid for workers. Wages and salaries are not increasing at any great pace and surprisingly, benefit costs are being kept in check as well.
It was expected that to retain workers, firms would start with improving the benefits that had been cut or whose costs were increased over the last few years. That has not happened. We are still in a modest compensation gain environment and that implies inflation is not likely to accelerate sharply soon. What does this mean for Fed decision-making? It doesn’t provide the cover that some may have been looking for to increase rates in December. There are two more employment reports before the next FOMC meeting, so we shall see.
As for the markets, low inflation has to keep hopes up that the Fed will not move for an extended period, though this week’s statement has had the desired impact of forcing investors to pause before they leap.
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