4/30/2015
By Jennifer Coombs

Compensation costs are moving higher as the employment cost index (ECI) rose by 0.7% in Q1-2015 versus a revised 0.5% increase in Q4-2014. On a year-over-year basis the index is up 2.6% and significantly exceed the Q4-2014 rated of +2.2%, but more importantly it significantly exceeds the Fed’s general inflation limit of 2.0%. This gain in costs is split evenly between wages and salaries which are up 0.7% on the quarter, and benefits are up 0.6%. On a year-over-year basis, wages and salaries are up 2.6% while benefits are up 2.7%. The Fed is now set to raise interest rates at the drop of a hat, and today’s ECI is very closely followed by policymakers as a factor in their rate hike decision. Yesterday’s Fed minutes noted that compensation inflation remains low, but these numbers clearly don’t jive with that assessment.

Lastly, the always-volatile Chicago purchasing managers index (PMI) jumped back into expansionary mode in April, with a reading of 52.3 versus a depressed 46.3 in March. The strength for the month is centered on new orders, which surged a whopping 12.8 points to a reading of 55.1 for the highest reading in the component since January 2015. This is the largest month-to-month increase for this reading in over 30 years. Additionally, the backlog orders, employment and production components were also higher for the month. The gauge for inflation is currently at a multi-year low, and this is the case in many of the April Fed reports. Since this PMI measures both manufacturing and non-manufacturing data in the Chicago area, the readings are often very jumpy. However, this will fit in with the Federal Reserve’s expectations that the economic slowdown in the first quarter was due to a lot of one-time factors and that the second quarter should see a recovery in underlying growth rates.

Initial jobless claims, not skewed by special factors, plunged 34,000 in the week of April 25^th to 262,000; which is the lowest level since all the way back to April 2000. The 4-week average is down by 1,250 to a 283,750-level which is just below what it was a month-ago and points to improvement for the April employment report (to be released on May 8^th). 

Additionally, March consumer spending rebounded 0.4% (and was up 3.0% year-over-year) from a revised increase of 0.2% percent in February. However, the data suggests that people remain somewhat cautious in their spending habits despite having several months of cheaper gasoline and rising consumer confidence. In March, spending increased, although less than expected, and at the expense of savings which edged lower to 5.3% from 5.7% because incomes were unchanged.

Jennifer Coombs
Wall Street Strategies

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