US: Employment costs expected to pick up further - Wells Fargo

Today’s reports showed that employment costs rose 0.7% in Q3. According to analysts from Wells Fargo, a tight labor market points to further strengthening ahead. 

Key Quotes: 

“In another sign of a tight labor market, employment costs rose 0.7 percent in the third quarter. At 2.5 percent, the employment cost index (ECI) is just shy of the post-recession high hit briefly in 2015 and is ahead of the 2.3 percent increase registered this time last year.”

“The strengthening in employment costs, particularly the wages & salaries component, is consistent with the firming in average hourly earnings. Looking at the drivers of both average hourly earnings and the ECI, we expect to see wages and compensation costs pick up over the coming year.”

“The unemployment rate has fallen below both the Fed and Congressional Budget Office’s estimates of full employment, indicating labor has become relatively scarce. That scarcity has been echoed in the share of small businesses reporting that they have at least one hard to fill job opening.”

“While at cycle highs, the quit rate implies a more moderate pace of strengthening in compensation as it has moved sideways since the start of the year and remains a bit below the levels of the past expansion.”

“The extent of the upturn in employment costs will also probably be limited, however, by low inflation expectations. Without much pricing power, businesses should remain cautious about raising compensation.”