Regarding the Soft ECI

July 31st, 2015 9:16 am | by John Jansen |

Stephen Stanley is Biblical in his disbelief of the BLS data. He writes an interesting piece on the ECI report this morning.

Via Stephen Stanley at Amherst Pierpont Securities:

The ECI was stunningly soft in Q2, rising by only 0.2%, the lowest reading in the roughly 20-year history of the series.  Wages and salaries increased by 0.2%, while benefits costs advanced by only 0.1%.  It looks like the volatility from the 0.7% rise in Q1 to the 0.2% increase in Q2 came from swings in bonuses in sales-related positions.  The “sales and related” category posted a 2.5% surge in Q1 and fell back by 2.3% last quarter on a seasonally adjusted basis.  The BLS also publishes a further breakdown within the not seasonally adjusted data.  “Sales and related” positions registered a 1.9% jump not seasonally adjusted in Q1 and a 1.7% drop in Q2, but the same category excluding “incentive paid occupations” posted relatively boring gains of 0.5% (nsa) in Q1 and 0.7% in Q2.  In short, the 0.2% rise in Q2 is not entirely indicative of the underlying reality, but the Q1 figure was exaggerated.  Taking the two-quarter average yields an annualized pace of about 2%, which is also the average over the last four quarters and pretty much the prevailing pace for most of this expansion.  So, the bottom line for the ECI is that, like average hourly earnings, it shows very little movement over the past year from the previous trend.

Now, back to reality.  Call me stubborn, but I am not buying what the BLS is selling.  I can present hundreds of anecdotal and survey indications that wages are firming, as well they should as the unemployment rate approaches 5%.  The Labor Department can publish data suggesting no wage growth from now until the cows come home, and it will not diminish my conviction about what is actually happening in the real world.  Yesterday’s piece by Gary Rosenberger provided just the latest in a string of reports that firms are being forced to boost pay to attract workers.   I am not suggesting that wages are accelerating sharply and running out of control.  But there is no way that wages are really as benign as the ECI and average hourly earnings figures suggest.  And, by the way, while I am sure that this ECI reading will be gobbled up like a batch of fresh out of the oven fudge brownies by the most extreme doves at the Fed, FOMC minutes and Beige Books have also consistently noted in recent months that wages are picking up.  Thus, the bulk of the Committee will certainly be less dogmatic than I am, but only those looking for excuses not to move are going to be fooled by this number.  Certainly, at the margin, this data point weighs against liftoff, but, taken in full context, I do not expect this release to be a game changer for the Fed.

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