U.S. Employment Cost Index (Q3-2023)

Q3 Employment Cost Index shows employee compensation remains meaningfully above what's consistent with 2% inflation  

• The Employment Cost Index (ECI) – the Federal Reserve's preferred all-in measure of wage growth – rose 1.1% quarter-over-quarter (q/q, 4.4% annualized) in the third quarter, slightly stronger than Q2's gain of 1.0% q/q and ahead of the consensus forecast. On a year-over-year (y/y) basis, the ECI edged down a tenth of a percentage point to 4.4% – the slowest pace of growth in nearly two-years.     
• Compensation across the private sector (1.0% q/q) matched Q2's gain but accelerated across the public sector (to 1.5% from 1.0% in Q2) by the fastest pace in a year. 
  • Across the private sector, wages & salaries increased by 1.1% (4.3% annualized), while benefit costs were up 0.9% (3.4% annualized). 
  • Wages & salaries across state & local government were up a whopping 1.8% q/q (7.5% annualized), which was the strongest quarterly gain since Q1-1984. Benefit costs rose by a more moderate 1.2% (4.7% annualized)
• The industries showing the strongest overall compensation gains relative to last year are education & health care (5.0% y/y), other services (4.9% y/y) and state & local government (4.7% y/y). Unsurprisingly, these are all industries that still have elevated job vacancies relative to pre-pandemic levels.

Key Implications

• This morning's ECI numbers are consistent with a labor market that remains tight but is showing some signs of cooling relative to a year-ago. Although compensation growth has clearly turned a corner – having fallen 0.7 percentage points from last year's high of 5.1% – it's still running at a pace that's roughly a full percentage point above what's consistent with 2% inflation.  
• While this morning's numbers will not sway the Federal Reserve from holding rates steady at its next interest rate announcement tomorrow afternoon, the ongoing strength in recent data suggests policymakers may have a bit more work to do before calling it quits on this tightening cycle. Current market pricing attaches just over a 25% probability to another rate hike later this year, but the Fed's tone on Wednesday and/or another strong employment reading on Friday can quickly push that higher. Stay tuned, it's going to be an eventful week!  

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