When it comes to measures of compensation watched closely by Fed officials, and specifically by Jerome Powell, the Employment Cost Index is at the top of the list.
Indeed (and as I never tire of reminding readers), it was a sudden acceleration on the quarterly ECI series which, according to his own dramatized retelling, prompted Powell’s initial hawkish pivot.
That’s the context for Q4 ECI, released ahead of the Fed’s January decision on Wednesday. I won’t bury the lede for a change: It undershot consensus, good news in the current environment.
The 0.9% increase was set against expectations for another 1% gain. The range of estimates, from nearly five-dozen economists who ventured a guess, was 0.8% to 1.2%.
Q4’s print was the coolest since April of 2021 which, not coincidentally, is when inflation took off in earnest in the US.
Again, the undershoot is a welcome development. Powell was likely to mention it during his press conference if given the opportunity. You can be sure it came up at the FOMC meeting.
Wages and salaries for private sector workers, which I also like to look at in this release, rose 4.3% YoY.
That was also the coolest since Q2 of 2021.
I don’t see any utility in over-complicating things or interrogating the numbers much further: This was another piece of evidence in support of the soft landing narrative, and it came on a day when ADP said hiring slowed and wage growth continued to cool in January.
Commenting on the ECI data, ING’s James Knightley noted that the quit rate in the JOLTS report is a good leading indicator for the wages and salaries series shown above.
The quit rate has, of course, moved down. Specifically, it was 2.2% in December, the lowest since September of 2020.
“There may be jobs available, but they aren’t attractive enough for people to want to quit their current job and move employer,” Knightley remarked.
“If new jobs aren’t offering good enough pay, there is less incentive for employers to offer bumper pay rates to retain staff and you get this cycle of slowing pay and benefits,” he went on. Although that’s “not great news for our paychecks,” it’s disinflationary, Knightley said, and increases the odds of “meaningful Fed easing.”
