Gauge of U.S. Worker Costs May Steal GDP's Spotlight This Friday

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(Bloomberg) -- All eyes will be watching U.S. economic data this Friday, but the focus could quickly turn to a different kind of growth.

With the initial report on gross domestic product forecast to show a first-quarter slowdown that’s become familiar in recent years, figures on employment costs -- due at the same time, 8:30 a.m. in Washington -- have the potential to steal some thunder, especially if they top forecasts.

That’s because financial markets are sensitive to any signs of heightened inflationary pressures that could give Federal Reserve policy makers reason to become more aggressive in raising interest rates. Earlier this year, stocks sank and Treasury yields rose after the January jobs report showed a spike in average hourly earnings, later revised downward.

This time around, the ECI -- especially a jump in its private-sector wage component -- could also rattle investors.

“An extension of this climb, if it were to unfold, would certainly grab the Fed’s and financial markets’ attention, as such a result would support officials’ projections for a quickening in the pace of inflation and the potential need to raise interest rates greater than what the financial markets have priced in,” Sam Bullard, senior economist at Wells Fargo Securities LLC, wrote in a note.

The Labor Department’s ECI -- covering benefits in addition to worker pay -- is projected to climb 0.7 percent in the first quarter after a 0.6 percent gain in the previous three months, according to a Bloomberg survey of economists. On a year-over-year basis, the gauge was up 2.6 percent in the fourth quarter, matching the biggest advance since 2008. Private-sector wages and salaries, which climbed 2.8 percent, also matched the strongest increase of the expansion.

The government’s quarterly read on the ECI, which measures employer-paid taxes such as Social Security and Medicare in addition to the costs of wages and benefits, differs from the Labor Department’s monthly figures on average hourly earnings, which can be influenced by shifts in industry employment and hours.

At the same time, the ECI in the first quarter is prone to surprises as it includes year-end bonuses. Those could be magnified this time by one-time payouts made by companies in response to the Republican-backed tax cuts enacted in December.

What Our Economists Say

We need only look back to the Feb. 2 average hourly earnings surprise in the jobs report to see the market agitation than can transpire from a wage pressure surprise -- four days of market drama.

-- Carl Riccadonna, Bloomberg Economics

©2018 Bloomberg L.P.

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