Another Take on ECI

July 31st, 2015 9:19 am | by John Jansen |

This one is by Eric Green at TDSecurities. He is also a bit flummoxed but does not think that this will dissuade the FOMC from hiking rates in September.

Via Eric Green at TDSecurities:

The Q2 ECI was dismal. Total compensation rose only 0.2%, well below the expected gain of 0.6%, and well off the average 0.7% gain over the past four quarters. The rise in wages was the smallest since 1982. The details of the report were no less encouraging. This will be good for stocks (margin compression may be slower than presumed), good for bonds (non inflationary and not constructive for Fed), and bad for the dollar owing to combination of the above. Curve should bull steepen on this.

Total compensation rising only 0.2% was driven by a combination of weak wage growth (0.2%) and spectacularly weak benefit gains (0.1%). All the weakness was centered on the private sector. Wages and salaries there rose 0.2%, but total compensation was 0.0% owing to a -0.2% (that is a decline) in benefits. That is very curious. Unionized benefits led this decline (-0.8%) while unionized benefits fared better (0.0%). Part of this unusual pattern may be attributed to the adjustment to Obamacare, but that is just a suspicion and if so then it looks marginally better than it looks. However, that does not change the tone of this report. It was ugly.
This does not mean the odds of a September rate hike have fallen below even. This data has periodically proved to be very lumpy (seasonal issues, timing issues etc) and the sharp decline is inconsistent with other measures of wage inflation that is trending higher, not falling off a cliff. Moreover, labor market fundamentals are improving, job openings at record highs, and slack on a steady downtrend. This is precisely how the Fed will interpret this report, even if the numbers here are atrocious. The broader trends are still unquestionably favorable.
Yellen has disassociated rising compensation with the timing of lift-off (link to inflation nebulous at best), but we know she wants to see more not less. Still there are two clear implications from this report—one is that it will put more attention on other data as confirmation of sustained economic strength—another is that it simply reinforces a low and slow hiking cycle in which the guts of a normal recovery remain too elusive for comfort.
September rate hikes still on.
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