Fed’s Favorite Wage, Inflation Measures Both Cool

The Fed’s preferred measures of compensation costs and inflation came in softer than economists expected, the last of this week’s top-tier US data releases showed.

The Employment Cost Index rose 1% in Q2, the BLS said Friday. That was slightly below the 1.1% consensus.

I’m compelled to recycle the backstory. Context is key here. This is the series which, according to his own dramatized retelling, compelled Jerome Powell to change his mind about the likely trajectory of inflation in the US. Put differently: ECI killed “transitory,” not CPI.

Although the 1% increase was still too hot for comfort, it was the slowest since Q2 of 2021 — so, the slowest since inflation took off in the US in earnest. Excluding incentive compensation, private wage growth was 1.1% in Q2, down from 1.5% in Q1.

Some might point to recent labor negotiations as evidence that the threat of a wage-price spiral will hang over the US economy for the foreseeable future. I wouldn’t argue, but I wouldn’t wholeheartedly endorse such narratives to the extent they constitute veiled criticism of unions and workers’ efforts to extract higher pay and better working conditions.

Capital, as an economic actor, was allowed to accumulate (far) too much power over the past four decades. And the greatest trick capital ever pulled was convincing large swaths of labor that they aren’t actually labor. That’s another way of saying too many Americans still see themselves not as an exploited proletariat, but as “temporarily embarrassed millionaires.”

Compensation costs for private industry workers rose the same 1% in Q2, Friday’s data indicated, as did wages and salaries. On a YoY basis, the latter rose 4.6%.

Q2 marked the slowest pace of private sector, YoY wage growth reported in the ECI series since Q3 of 2021.

The largest gains were in the services sector, where compensation costs grew 5.3% for the 12-month period ending in June. The biggest increase was in leisure and hospitality, at 5.4%.

Clearly, these figures remain too high for the Fed, but they’re moving in the “right” direction. And do note: Wages are growing in real terms now, as headline CPI and PCE fall.

Inflation-adjusted wage growth was the briskest in three years during Q2.

Meanwhile, personal spending rose 0.5% in June, separate data released Friday showed. That was better than expected (and it was a “hot” 0.5% besides), but not exactly a surprise given the upside personal consumption print from Thursday’s advance read on Q2 GDP.

Real personal spending was likewise buoyant, rising 0.4%, the most since January’s blistering print. Consensus expected 0.3% there.

Again, those figures shouldn’t necessarily move any needles. They were effectively in the market yesterday, but they do confirm that the US consumer was feeling pretty good about things midway through 2023.

Personal incomes rose less than expected, and the saving rate was 4.3%.

Core inflation on the Fed’s preferred gauge rose 0.2% last month from May (0.1655% unrounded). The headline PCE gauge rose by the same amount (0.16145% unrounded).

On a YoY basis, core inflation receded to 4.1%. That was below estimates. Headline PCE is now running just below 3% YoY.

All in all, Friday’s data supported the Goldilocks/soft landing narrative, much like Thursday’s GDP report (which isn’t surprising, since some of Friday’s figures were embedded in that report).

The ECI figures will be welcome at the Fed. Powell mentioned the series at this week’s press conference, and softer compensation costs are a key piece of the disinflation puzzle.

I suppose it’s time to ask if all of this good news is already in the price for an equity market trading near record highs on a 20x multiple.