A Cold, Hard Look at the Employment-Cost Crystal Ball - TheStreet

A Cold, Hard Look at the Employment-Cost Crystal Ball

Making the case for a bigger-than-expected ECI print Thursday.
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I Spy ... on the ECI

JACKSON HOLE, Wyo. -- The

Employment Cost Index

(or ECI)

measures the change in the cost of labor. It includes both

wages and salaries

(roughly three-fourths of the index) and employer costs for employee

benefits

(the other fourth).

The ECI

printed 0.4% for the first quarter.

Then it

printed 1.1% for the second.

What's it going to print for the third?

Will the number to be released Thursday look more like the (small) first data point of the year? More like the (big) second?

Or perhaps an average of the two?

Wages and Salaries

Average quarterly increase over past year: 0.9%.

Average quarterly increase over past two years: 0.9%.

Average quarterly increase over past three years: 0.9%.

Third-quarter increase in 1996: 0.6%. In 1997: 0.8%. In 1998: 1.1%.

Projected third-quarter increase for 1999: 1.2%.

Why?

The

average hourly earnings series

from the employment

report tracks the wages and salaries portion of the ECI reasonably well. On a final-month-of-the-quarter-over-final-month-of-the-quarter basis -- that's how the folks who put together the ECI measure things -- it showed the same increase during the July-August-September period (1%) as it did during the April-May-June span.

The average hourly earnings series has previously held steady between quarters thrice since the New Era began in 1996.

Wages and salaries showed acceleration on all three occasions.

Also note that wages and salaries have shown deceleration between the second and third quarters six times in the history of this series; only once did average hourly earnings fail to warn of the slowdown.

This correspondent therefore guesses that the same 1.2% increases in wages and salaries that hit during the second quarter will hit again during the third.

Why not even a bit higher? For the fact that wages and salaries sped up so much between the first quarter and the second. The seven-tenths acceleration we saw between those periods went down as the biggest ever; the second biggest pop on record (a five-tenths increase during the final quarter of 1993) was followed by a two-tenths deceleration during the subsequent quarter.

The giveback possibility therefore works against a bigger increase.

Benefit Costs

Average quarterly increase over past year: 0.6%.

Average quarterly increase over past two years: 0.6%.

Average quarterly increase over past three years: 0.6%.

Third-quarter increase in 1996: 0.4%. In 1997: 0.4%. In 1998: 0.7%.

Projected third-quarter increase for 1999: 0.9%.

Why?

The

consumer price index for medical care

tracks the benefit costs portion of the ECI reasonably well. On a final-month-of-the-quarter-over-final-month-of-the-quarter basis -- that's how the folks who put together the ECI measure things -- it showed the same increase during the July-August-September period (1%) as it did during the April-May-June period.

The CPI for medical care has previously held steady between quarters five times since the New Era began in 1996.

Benefit costs held steady on one of those occasions and showed acceleration on two.

Also note that benefit costs have shown deceleration between the second and third quarters six times in the history of this series; only once did the CPI for medical care fail to warn of the slowdown.

This correspondent therefore guesses that the same 0.9% increases in benefit costs that hit during the second quarter will hit again during the third.

Employment Cost Index

Average quarterly increase over past year: 0.8%.

Average quarterly increase over past two years: 0.8%.

Average quarterly increase over past three years: 0.8%.

Third-quarter increase in 1996: 0.6%. In 1997: 0.8%. In 1998: 0.9%.

Projected third-quarter increase for 1999: 1.1% (simply the weighted sum of the projections for wages and salaries and benefit costs).

Market consensus: 0.9%.

Reading People's Faces

There is not a great (statistical) case to be made for a bigger-than-expected ECI print.

There is a decent one though, and the fact that a couple of the forecasters who nailed the recent

producer prices

surprise are looking a number with a one-handle is worth mention.

Given the status of current market sentiment -- yields fail to fall (and, indeed, even continue to rise) on bullish-to-neutral numbers and surge on unambiguously unkind ones -- the ECI number presents a great fun-money gambling opportunity.

And hey.

No babies -- especially crying ones -- in the casino.

Side Dish

I passed on a

Moose

hokey game to watch the

Tyson

fight.

What a joke.

And hey

Denver

fans? And

Niner

fans?

You sissies sure are quiet this year.

And hey. No snooker write-ins.

Best table game?

Billiards.

Foosball.

Ping-Pong.

Air hockey.

Regular hockey.