A key measure of employment costs watched closely by the Fed rose more than expected in Q3, data released on Tuesday showed.
The Employment Cost Index posted a 1.1% gain from the prior quarter, ahead of the 1% increase economists expected.
If you’re not apprised, this does matter. To recycle language that’ll be very familiar to regular readers, it was ECI which, according to his own dramatized retelling, compelled Jerome Powell to change his mind about inflation in late 2021.
Generally speaking, you don’t want this number to overshoot in the current environment. The range of estimates from four-dozen economists who ventured a guess was 0.8% to 1.2%.
I should be clear: This isn’t a disaster. It’s just a(nother) testament to the notion that the cost of labor and worker retention is elevated these days. Labor is empowered. Just ask Ford, GM and Stellantis. On a 12-month basis, compensation costs for all civilian workers rose 4.3%, down from 4.5% in Q2.
The figure below shows wages and salaries both for all civilian workers and private industry workers specifically.
As you can see, pay growth is still very elevated. It’s debatable (to put it diplomatically) whether current levels are (or can be) consistent with price stability as arbitrarily defined by the Fed.
The pace of compensation cost growth for state and local government employees rose sharply in Q3 to 1.5% versus Q2’s 1% rate. Wages and salaries for those workers rose 1.8%, the briskest pace in a year.
Benefit costs rose 0.9% from Q2 and 4.1% YoY. Those figures for the prior quarter were 0.9% and 4.2%, respectively.
I don’t think there’s a lot of utility in breathless editorializing here. The first chart (above) says it all: The pace of compensation cost growth remains at or above anything witnessed prior to the pandemic in data going back more than two decades.
Relatedly, Q3 2023’s ECI headline wasn’t that much cooler than Q3 2021‘s ECI headline which, coming full circle, was a major factor in convincing Powell that “transitory” was past its sell-by date as a description of inflation in the US.
So, they keep raising interest rates despite the lack of impact on inflation measures?
If the patient is corpulent, you have to push the scapel deeper to reach the organs?
As a reasonably corpulent individual with the traces of four large holes on the lower half of my torso I’ve always wondered just how my skilled surgeons determined just how far in to go.
That question struck me as well. If mortgages hit 8%, with inflation at 3.5% that represents a 4.5% real rate. Added to the price of the home, that would seem to be pushing hard on continued inflation.
Yes, but it is a double-edged sword. Higher funding costs also impact homebuilders’ access to capital, reducing new supply. Is that part of the reason that higher interest rates are not hammering home prices?
At a higher level, what outcome we are trying to achieve? Is putting housing out of reach for a majority of Americans the desired goal? Did they cause inflation? If not, why should they be the ones targeted?
Why not target spec buyers, from the small buyer of investment properties to the private equity folks scooping up vast tracts of housing to rent out? Other countries seem to be able to put higher downpayment requirements and taxes on those buyers. But it’s a nonstarter in our Congress.
Yes, interest rates are the only tool the Fed has, but I don’t see results that merit the collateral damage they are causing.
Meanwhile, did Pepsi raise prices by 15% again last quarter for the fourth in a row?
Out here in California, we could go a long way toward improving the supply of homes by simply eliminating property tax caps on second properties. Unfortunately, voters are so afraid that they might lose their prop 13 protection on their primary residence that they’ll believe any and all fear mongering related to prop 13.
On a 12-month basis, wage inflation is lagging CPI. To quote the Talking Heads, same as it ever was, same as it ever was, same. as. it. ever. was.
Stop making sense!
In many cities- the cost to rent is about half the cost to own an equivalent home. So with higher real compensation, people who can’t afford to buy a home at these prices are renting and simultaneously enjoying higher savings (for a future home purchase) and/or more discretionary cash to spend.
Even if rates do come down- which could result in more people selling their homes (because their existing mortgage rate is not as advantageous as when lending rates are higher), there will be a lot of “pent up” demand- keeping home prices higher for longer- even as mortgage rates decrease.
Crazy times.