Employment Cost Index (ECI)

The Employment Cost Index (ECI) is a comprehensive measure of labor costs. It measures the total employee compensation costs, including both wages/salaries and benefits for employees in the non farm private sector (about 4,400 sampled) and state and local governments (about 1,000 sampled). As such, ECI represents the price of labor as compensation per employee-hour worked, during the previous quarter. The ECI is one way to evaluate wage trends and the risk of wage inflation, as well as possible price pressures. If wage inflation threatens, it is possible interest rates will rise through market forces (bond prices dropping) or Fed intervention. Over the business cycle, ECI shows little difference in behavior during recession, recovery and expansion. In fact, it is thought that the ECI is a lagging indicator of economy and inflation. Since the employment cost index was mentioned by Fed Chairman Greenspan in July 1996, it has risen in importance in the eyes of t he hourly earnings data in the employment report, and the ECI does add something: an adjustment for shifting employment between industries, and a look at benefit costs. These additions are interesting, but typically do not alter the view of the employment cost picture which was left by hourly earnings. ECI is less closely watched now that wage inflation is not a serious market concern. The market focuses on the quarter-to-quarter and year-to-year changes in each of three categories: total employment costs, wages and salaries, and benefit costs. The figures are sometimes skewed by large year-end bonuses in the financial industry; analysts often exclude the sales commission component of wages and salaries to adjust for this factor. The Employment Cost Index (ECI) report is scheduled for release at 7:30 (CST) at the end of first month of every quarter by the Bureau of Labor Statistics.

POTENTIAL IMPACT ON INTEREST RATES: HIGH