1. Economic Indicators: Introduction
  2. Economic Indicators: Beige Book
  3. Economic Indicators: Business Outlook Survey
  4. Economic Indicators: Consumer Confidence Index (CCI)
  5. Economic Indicators: Consumer Credit Report
  6. Economic Indicators: Consumer Price Index (CPI)
  7. Economic Indicators: Durable Goods Report
  8. Economic Indicators: Employee Cost Index (ECI)
  9. Economic Indicators: Employee Situation Report
  10. Economic Indicators: Existing Home Sales
  11. Economic Indicators: Factory Orders Report
  12. Economic Indicators: Gross Domestic Product (GDP)
  13. Economic Indicators: Housing Starts
  14. Economic Indicators: Industrial Production
  15. Economic Indicators: Jobless Claims Report
  16. Economic Indicators: Money Supply
  17. Economic Indicators: Mutual Fund Flows
  18. Economic Indicators: Non-Manufacturing Report
  19. Economic Indicators: Personal Income and Outlays
  20. Economic Indicators: Producer Price Index (PPI)
  21. Economic Indicators: Productivity Report
  22. Economic Indicators: Purchasing Managers Index (PMI)
  23. Economic Indicators: Retail Sales Report
  24. Economic Indicators: Trade Balance Report
  25. Economic Indicators: Wholesale Trade Report

The Employment Cost Index (ECI) is a quarterly report of compensation costs that is released in the final month of the quarter, with a cutoff date of payroll periods ending the twelfth of the month of the release. The ECI is an index-based indicator that presents the changes in wages, bonuses and benefits from the previous quarter, displayed on a per-hour basis. All non-farm industries are covered, with the exception of federal government employees (which only make up 2-3% of the work force).

The data is provided by the Bureau of Labor Statistics (BLS) and is broken down by industry group, occupation and union vs. non-union workers. The data is compiled through separate surveys of non-farm businesses (about 4,500 sampled) and state and local governments (about 1,000 sampled). The index has a base weighting of 100. The current base period is December 2005.

Main features of the Employment Cost Index

Some of the main features of the index include:

  • Tracks changes in wages, salaries, benefit costs and total compensation
  • Data is shown in total and broken down by industry in the private sector and for state and local government workers
  • Tracks changes by industry, occupation, union versus non-union, census region and category as well as for a set of 15 major metropolitan areas
  • Tracks seasonally adjusted and non-adjusted data, as well as historical data on changes in labor costs
  • The index uses fixed weighting to adjust for changes in occupations and industries over time

What the Employment Cost Index Means for Investors

The ECI is watched largely for its inflationary insights. Wages represent the lion's share of the total cost for a company to produce a product or deliver a service in the marketplace. The relative percentage will vary by industry, making the data release valuable on an inter-industry level

The ECI is one of the main economic indicators used by the Federal Reserve to set monetary policy. Another benefit of the methodology used in the ECI is that wage changes that occur as a result of a shift in the occupational mix of workers can be captured here using a "basket of occupations" approach similar to that of the CPI. Results of the ECI are less likely to be affected by people shifting to lower or higher-paying jobs.

The ECI is a lagging indicator; rising costs at this level speak to economic overheating that has already been visible at earlier points in the economic food chain (commodity costs, retail sales, gross domestic product), and suggest that some rise in inflation is inevitable.

This indicator can move the markets if it shows marked differences from street estimates. Rising compensation costs are usually passed on to consumers because they are such a large corporate expense.

The ECI is used as part of the formula that calculates productivity. Investors should always compare the ECI to total productivity figures, paying particular attention to relative rates within industries in which they have a stake.

Strengths of the ECI:

  • The ECI calculates the total set of employee costs to businesses, not just wages. Health insurance, pensions and death-benefit plans, and bonuses are all calculated here and broken out separately from wages and salaries.
  • Data is provided with and without a seasonal adjustment
  • Well respected by both the Fed and business leaders; company managers use the ECI to compare their own compensation costs relative to their industries
  • Rates of change are showed from the previous quarter and on a year-over-year basis

Weaknesses of the ECI:

  • The data is only released quarterly, and with a slight overlap, covering a mid-month period
  • Hourly earnings shown in the monthly “Employment Situation Report” provide some headway into this release, taking some of the surprise value out of wages
  • Can be volatile when periodic bonuses, commission payments and the like are taken into account (especially at year-end); economist interpretation is often needed to fully digest the report

Economic Indicators: Employee Situation Report
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