Compensation costs for US workers rose less than expected in Q4, closely-watched data out Friday showed.
Markets were on edge for the latest read on the employment cost index amid acute fears of a wage-price spiral or, perhaps more aptly, acute fears that the Fed might see early signs of such a spiral and respond accordingly.
The 1% headline ECI print was well below the 1.2% consensus (figure below) and near the low-end of the range. Economists were looking for anything from a 0.9% increase to a 1.5% surge.
Needless to say, the index is still elevated. Q4’s print was only “cool” by comparison to Q3’s record high. Nevertheless, it might provide some relief for risk assets to the extent stocks are trading on the macro and not purely driven by flows, hedging and positioning after a wild month.
Compensation costs rose 4% YoY, while wages and salaries jumped 4.5% for the 12 months ended December. For private industry workers, the figures were 4.4% and 5%, respectively. Those are the highest readings in history.
Gains for services sector employees were dramatic. Comp costs rose 8% in leisure and hospitality (figure above), for example, yet another testament to intractable friction in the largest part of the world’s biggest economy.
Meanwhile, personal spending data for December betrayed a sharp deceleration, but no shaper than expected. The 0.6% drop was in line with consensus (figure below).
Real personal spending was down 1%, slightly less than the forecasted 1.1% drop, but a slight downward revision to November’s data means real PCE has fallen for two straight months (figure above). Personal incomes rose 0.3%, less than the anticipated 0.5% gain.
Americans spent less on goods last month, a decline that was only partially offset by an increase in spending on services, mostly healthcare. Within goods, spending on recreation, cars, household supplies, games, toys and newspapers all fell, as did outlays for furnishings and household durables.
The data came on the heels of (very) disappointing read on retail sales for December. The figures are also “stale” given the market receives them after GDP, but the more granular look at December is relevant at the current juncture for obvious reasons. Thursday’s nominally encouraging GDP data masked weakness under the hood. Some doubt the inventories tailwind will be sufficient to sustain the US economy if consumption remains weak.
The rise in PCE prices, 0.4% MoM, was in line with estimates, as was the monthly gain on core (0.5%).
However, the 4.9% YoY jump on the core index (figure above) was a tick higher than anticipated, and the highest in decades. Again.
The savings rate moved up in keeping with slower spending.
If the Fed was looking for something to bolster the case for a 50bps hike in March, they won’t find it in Friday’s data. Unless you count the inflation.
I’m not sure slower spending, below-consensus (albeit still hot) wage gains and unabated increases in consumer prices are amenable to a healthy economy. Nor, I’d gently suggest, are they amenable to a favorable outcome in the midterms. Depending, of course, on what you view as “favorable.”
People just havent been going out there and spending. When I talk to everyday people the trend seems to be holding off major purchases for spring not cancellation. There is just too much going on to organize a vacation or appliance upgrade right now. I think rage spending will take off soon. People are pissed about covid and inflation. When omicron passes and people see prices continuing to rise they will rush to lock in costs and engage in the usual retail therapy. Businesses are just front running this with the inventories. I think it’s a good decision on their part. We are going to have a busy next few months with lots of buying, I think.
I would have to disagree with Acer above. The trendline is decelerating. Is it a recession? No but the heat is coming out of the economy and it is in the process of rebalancing- higher supply and moderating demand. This is a good trend as long as it does not go too far. As for street forecasts- Bank of America is now trying to outcompete the rest of the street by forecasting 7 hikes in 2022 and a 1.75% funds rate by year end. Really? The Fed will be lucky if the economy is strong enough to do 4 hikes. My own best “forecast” is 2 maybe 3 (bridge anyone?). Two hikes and a taper will likely tighten financial conditions enough. A great way to invert the yield curve, blow out credit spreads and crash the stock market is to hike 7 times. That would almost surely put the US into a recession and reverse some of the employment gains made since the crisis started. Want to see a Democratic party wipeout- go ahead make my day and hike 7 times.
I agree. It seems to me that if the Fed really intends to run off its balance sheet by 2-4 Tril, that plus two hikes should at least justify a mid-year pause to check for casualties and whether inflation is slowing.
H-Man, Acer and RIA summed it up pretty well…… so just pick one.
H-Man, I rarely post twice but saw a piece by Bianco that pushes me towards the RIA camp. It really gets down to JP choosing between Wall Street and Main Street and Main Street will be the winner. Bianco referred to a survey where 67% don’t believe the fed is doing enough to combat inflation. Meanwhile 40% of the people in this country don’t have $1,000 in the bank — those people are getting hammered by inflation. The same people who will vote in the mid-terms. I think JP is going to raise rates until the market cries uncle and reprices. Bianco suggests inflation will peak in April or May but if inflation doesn’t fall rapidly to 3%, JP will keep the petal to the metal until it does, no matter how much Wall Street wails. The bottom line is the market will be repriced lower. Due to the tight labor market, the R that may follow may not have a lot of staying power if inflation is dissipating.