Serfs Up

Workers sure are expensive these days. They’re hard to come by, too.

Compensation costs for civilian US employees posted another large increase in Q3, key data out Friday showed.

At 1.2%, the headline ECI print matched estimates, which was both good and bad news.

The good news is twofold. First, and most obviously, workers are getting compensated for their labor, as opposed to toiling in something loosely akin to serfdom. (Thanks for your shift. Here’s a sack of nickels towards your next iPhone. Also, don’t forget your share of whatever’s in the drive-through tip cup. If you like, you can fix yourself a free latte and take a piece of biscotti home with you.)

Second, a consensus print (as opposed to a hotter-than-expected print) doesn’t argue for an incrementally more urgent approach from the Fed. To briefly recapitulate, it was the Q3 2021 ECI report which, according to his own dramatized retelling, changed Jerome Powell’s mind about the viability of the Fed’s still dovish policy bent this time last year. A hotter-than-expected headline on Friday had the potential to upset expectations for Powell to telegraph a December deescalation in the pace of rate hikes following next week’s assumed 75bps move. An in-line print presumably kept those hopes alive.

The bad news, from the market’s perspective, is that 1.2% is still scorching hot. Outside of the pandemic context, there’s but a single comparable reading going back more than 20 years (figure below).

The wage-price spiral threat remains, even as this marks a third straight decline in the pace.

Wages and salaries for private industry workers rose 5.2% for the 12-month period ending last month. That was down from the prior reading, but counted as the second fastest increase in series history (figure below).

The number for all civilian workers was 5.1%, also the second highest ever.

Note that these figures were materially lower in Q3 of 2021. The pace of wage and compensation gains is still very brisk. In services sector occupations, comp costs rose almost 8% on a YoY basis.

So, the bad news for markets is that these figures don’t argue for any kind of rapid step-down in rate hikes, and certainly not for a near-term pause. You could suggest we’ve seen peak wage and comp growth, just as you could argue that peak inflation is coming soon to a CPI report near you (notwithstanding bitter disappointment after bitter disappointment on that front). But that’s something different than suggesting we’ve heard the all-clear.

The bad news for workers, of course, is just that pay growth isn’t keeping pace with inflation. As the figure (below) shows, the math still doesn’t work. At all.

The inflation-adjusted figures are what really matters, with an emphasis on “real.”

In 12-month, constant-dollar terms, wages and salaries for private industry employees fell 2.7%. It was the third worst showing on record. Benefit costs in the private sector fell 3% when adjusted for inflation.

Now cue somebody with a PhD to tell us how much better off the serfs are.