- The ECI matched expectation with a modest firming to 0.9% q/q (3.6% annualized) in 4Q24.
- but the overall trend toward cooling continues, with year-ago growth slowing to a three-year low of 3.8%
- With productivity growth also solid, these data do not currently suggest significant upside to inflationary pressures.
The Employment Cost Index, matched our and consensus expectations with a 0.9% rise in the headline total compensation measure 4Q, or 3.6% at an annualized quarterly pace. This was slightly faster than the 0.8% q/q growth (3.2%ar) in 3Q24, but there has been a pronounced—if choppy—cooling in this measure since peaking at 5.5% in early 2021.
Consistent with this dynamic, the year-ago pace of growth in the ECI, which smooths some of the volatility across quarters, eased to 3.8% in 4Q from 3.9%oya in the prior quarter, and now stands at its slowest pace since 3Q21. Similarly, the wage and salaries component of the ECI ticked up to 0.9% (3.6%ar) in 4Q, while also cooling to 3.8%oya.
While this pace of wage growth remains above its pre-pandemic average, that is less concerning against a backdrop of stronger productivity growth in recent years as well. The deceleration is also broadly consistent with the trend decline in measures of labor market tightness, such as the JOLTS quits rate, or our own index of labor market tightness (although that index does flag the risk for some modest reacceleration in wage growth later this year).
Overall, the latest ECI data appear broadly consistent with Fed Chair Powell’s recent assessment that the labor market is no longer overheated and “not a source of significant inflationary pressures.”
The slightly higher quarterly pace of wage and total compensation growth was all
due to private industry workers, with growth slowing across goods-producing industries but accelerating within a subset of the service-producing industries, namely finance, professional services, wholesale trade, and leisure.
Wage growth was higher for state and local government workers (4.5%oya) than those in private industry (3.6%oya), but the latter are a very small share of the total and have largely lagged the dynamics of private sector workers by about one year.