KEY DATA: ECI (Private, Year-over-Year)): +2.0%; Wages: +1.8%; Benefits: +2.5%/Claims: 302,000 (up 23,000)

IN A NUTSHELL: “Wage and benefits pressures are barely starting to accelerate even as the labor market continues to strengthen.”

WHAT IT MEANS: If the labor market matters to Fed members and the concern centers around employment costs, then the quarterly Employment Cost Index should be an important number.  Whether it is or not for others, for me it is another critical part of the picture and right now businesses are still controlling workers costs but maybe not as well as they had been.   Private sector compensation costs rose at a solid pace in the second quarter though that came after an aberrant nonexistent increase in the first quarter.   Both wages and benefits jumped.  Looking over the year, though, the increases in total compensation, wages and benefits were all at the top of the range we have seen for the last couple of years but not above it.  Public sector costs are rising at the same pace even though wages and salaries are barely budging.  Looking across occupations, service workers are doing the worst, which is not surprise.   Whatever gains in compensation we have seen have been centered in the professional and construction worker ranks.

Jobless claims jumped, but that was expected.  Last week’s report was assumed to be a bit too low due to the random nature of vehicle sector summer shutdowns.  The four-week moving average, though, was the lowest in over eight years and that is without adjusting for labor force size.  If the claims numbers relate in any way to job gains, and I believe they do, then the July employment report which comes out tomorrow should be good.  Given the robust June gain, I expect July’s to be lower but we could easily average between 260,000 and 275,000 for the two months.  That would be impressive.  The unemployment rate could also decline.  I would not be shocked if it breaks 6%, though that is not in the forecast for this month.

MARKETS AND FED POLICY IMPLICATIONS: So far, so good, at least when it comes to controlling employment costs.  Yes, the second quarter number was hotter than expected but the first quarter rise was strangely minimal.  Average them out and there was not any major change in the rate of worker cost increases.  Benefit expenses have accelerated a touch and wages seem to be moving upward, but the pressures do not look great.  But the Fed has to look at least six to twelve months down the road and if the unemployment rate keeps declining, unless the law of supply and demand has been repealed for the labor market, compensation pressures simply have to increase.  The issues are when and how fast.  Most members of the Fed appear to believe it will be a lot later and not very rapidly but I am not that sure.  Tomorrow’s jobs report will give us another piece of the puzzle and hourly wages should be watched carefully.  Workers need more income to spend more and power growth to a higher level.  That does not seem to be happening just yet but I think we will be seeing signs very soon.