Wage history signals US employment nearly as good as it gets

If history is any indication, US unemployment may not fall much further after one of the most reliable measures of wage gains jumped in the last quarter, giving the Federal Reserve another reason to soon raise interest rates. Over the last three decades, the Employment Cost Index, which is the broadest measure of US labor costs and therefore one of the Fed's key guides as it mulls a rate hike, has begun to climb a year or a bit more before unemployment fell through an equilibrium level known as its natural rate.
The index rose a more-than-expected 0.7 percent in the January-March period, government data showed on Thursday. It has now risen by 0.7 percent in three of the last four quarters, making for solid gains over the last year. "With today's report, the long-awaited acceleration in wage gains has finally materialized," said Harm Bandholz, chief US economist at UniCredit Research.
In the first quarter, the 12-month percent change in the index was 2.6 percent, the largest gain since the fourth quarter of 2008. The rebound, if sustained, marks an end to stagnant wage gains in the wake of the 2008 financial crisis. The ECI index logged similar gains just before joblessness bottomed out in 1989, and again in 2000. The latest wage gains could signal that the unemployment rate, at 5.5 percent last month, is nearing a bottom. It could also pave the way for a prompt rebound in broader price measures, which would spur the central bank into action.
"It's pretty clear that we are moving closer to the Fed's discomfort zone," said Torsten Slok, chief international economist at Deutsche Bank Securities. Given that monetary policy acts with a time lag, Slok added, "the question here is, if they start hiking rates now, will they be able to slow down the acceleration we're seeing in wages." The Fed has kept rates near zero since 2008. On Wednesday the Fed repeated it will start tightening policy once it sees more progress in the labor market, and once it is "reasonably confident" inflation will rise to its 2 percent goal.
While the central bank could hike rates as soon as June, the economy's winter slump has left some Fed policymakers and many investors looking instead to September or later. The Congressional Budget Office estimates the natural level of unemployment, known as NAIRU and famously difficult to specify, at 5.4 percent. Fed forecasts put it at 5.1 percent.