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4Q Employment Cost: Steady But Modest

January 31, 2017

Bottom Line: Despite continued strength in job creation, the trend in employment costs is only rising modestly after staying flat for several years. The Employment Cost Index rose by 0.5% during the 4th Quarter, compared with market expectations for an increase of 0.6%. Wages and Salaries rose by 0.5% and are now 2.3% above their year ago level. Benefits costs remain subdued (despite political rhetoric that may suggest otherwise), rising just 1.8% in 2016, up from 1.2% in 2015 but still sharply lower than the 2.5% pace in 2014. Overall, modest employment cost growth also means modest compensation for employees, which is the raw material for personal income which, in turn, supports consumer spending. Consequently, consumer spending growth should remain modest.

The Employment Cost Index ROSE by 0.5% during the 3 months ended in December 2016, compared with market expectations for an increase of 0.6%.

Labor compensation is 2.2% ABOVE its year ago level, slightly above the year-over-year increase in headline consumer inflation thus moving real labor compensation slightly higher. Employment cost inflation peaked at 4.4% in 2002.

Wages and Salaries ROSE by 0.5% and are now 2.3% ABOVE their year ago level. Since late 2009, wage growth had flattened out at a very weak rate but is now rising modestly. Wages and salaries account for approximately 70% of total employment costs.

Benefit Costs ROSE by 0.4% and are now 2.0% ABOVE their year ago levels. The year-on-year gain had accelerated between late 2009 and mid-2011 but has retreated since then. Benefit costs account for approximately 30% of total employment costs.

Article by Contingent Macro Advisors