On July 24, the Conference Board asked the question: Is Wage Growth Accelerating?
The Board's answer was “All signs point to Yes!”
One big question regarding the US economy is whether wage growth is accelerating. You might think that this is a pretty straightforward question to answer, but it's not. There are many measures of wage growth, and they don't all point in the same direction.
For example, we can compare the year-over-year wage growth in recent years (Chart 1)according to four different measures, three from the US Bureau of Labor Statistics: the Employment Cost Index (wages and salaries), average hourly earnings (Establishment Survey), median weekly earnings (Current Population Survey), and the new Atlanta Fed Wage Growth Tracker. Some of these measures show a significant pickup, but some show no acceleration at all. What should we make of this?
Four Measures of Wage Growth
The Employment Cost Index (ECI) line in green shows a nice looking 2.6% year-over-year growth. The Atlanta Fed model shows an even bigger gain.
Two other measures show stagnation at best. So, which two lines should one believe?
Fresh data may provide a clue.
Shocking Decline in Employment Cost Index
Economists were stunned on Friday July 31 when the Employment Cost Index came in at 0.2% vs. the Bloomberg Consensus ECI estimate of 0.6%. Worse yet, the year-over-year ECI gain plunged from 2.6% to 2.0%.
In a shocking result, the employment cost index rose only 0.2 percent in the second quarter which is far below expectations and the lowest result in the 33-year history of the report. Year-on-year, the ECI fell 6 tenths to plus 2.0 percent which is among the lowest readings on record. The record low for this reading is plus 1.4 percent back in the early recovery days of 2009 when, apparently unlike today, there was enormous slack in the labor market.
The report's two components both fell back sharply with wages & salaries moving down to plus 0.2 percent from 0.7 percent in the first quarter and benefits at plus 0.1 percent vs the first quarter's plus 0.6 percent. Year-on-year, wages & salaries are up 2.1 percent with benefits below 2.0 percent at 1.8 percent.
This report, which is very closely watched by policy makers, may very well unsettle the outlook for the Fed's rate liftoff, pushing expectations to the December FOMC from the September FOMC. For the inflation outlook, wage pressures are supposed to be an offset to still weak commodity prices. The Fed's 2 percent goal for core inflation is looking elusive.
