Deeper Dive into the ECI

July 31st, 2015 10:23 am | by John Jansen |

This is a second piece from TDSecurities by Millan Mulraine. He conversed with the BLS and he thinks the softness is a result of one off type items and he suggests fading the strength derived from the data surprise.

Via Millan Mulraine at TDSecurities:

In addition to the earlier note sent out by Eric Green, I wanted to make a few observations on the ECI report following our conversation with the BLS. The key findings reinforce our earlier view that this anomalous performance in both wages and benefits has been driven by one-off factors that should unwind. As such, we believe that this report does not reflect a germane deterioration in underlying inflation dynamics, and will have little bearing on the Fed’s deliberation on policy.
1. The sharp deceleration in the growth rate of the wages and salaries component (which accounts for about 70% of total compensation) was driven by a sharp falloff in incentive pay this quarter versus Q1. This accounted in the sharp drop in the growth rate of private industry wages (on an NSA basis) from 0.8% q/q in Q1 to 0.2% q/q in Q2. Excluding commission sale incentives, wages and salaries were unchanged at a solid 0.6% q/q pace in both quarters.
2. Benefits were also affected by special factors, and the key driver was the redefinition to retirement benefits in Q2, perhaps caused by the underfunding of some retirement pension plans. The 0.8% q/q drop in unionized workers benefits was a big part of this. Here is a link of various stories highlighting this fact earlier this year ({http://bit.ly/1Df9WML}). In comparison, non-unionized benefits was unchanged.
Bottom-line: Fade the ECI weakness. Next week’s employment report will give a better picture on the outlook for inflation, and we look for a 0.2% m/m rebound in AHE in July after essentially stalling in June.
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