Employment costs spike, real consumption moderates, PCE inflation elevated

Employment Cost Index

*The Employment Cost Index, a comprehensive quarterly measure of employment costs for civilian workers that measures total compensation including wages and salaries and benefits, jumped 1.3% in Q3, generating a jump in its yr/yr rise to 3.7% from 2.8% in Q2 (Chart 1). This yr/yr increase is the largest since Q4 2004. The sharp acceleration in the ECI is noteworthy insofar as it is a much broader measure of employment costs than the monthly data on average hourly earnings. The combination of strong demand for labor and labor supply shortages plus higher inflationary expectations points to further increases in the ECI.

*The ECI for wage and salaries of civilian workers jumped 1.5% qtr/qtr, boosting its yr/yr rise to 4.2%. This is its largest rise since 1990 (Chart 2). The ECI for benefits rose 9%, lifting its yr/yr rise to 2.5%, only a touch higher than its average of 2.4% in 2019.

*The ECI rose 1% in goods producing industries (construction and manufacturing), lifting its yr/yr rise to 3.4%, and rose 1.5% in service producing industries, lifting its yr/yr rise to 4.2%. The largest rise occurred in leisure and hospitality, where the quarterly rise of 2.5% boosted the yr/yr rise to 6.9%.

Personal Income and Consumption

* Personal income fell 1% (-$216 billion) on an annualized basis in September underpinned by a 72.3% (-$254 billion) decline in unemployment insurance receipts, reflecting both the decline in unemployment (-8.5%) and expiration of pandemic unemployment insurance in September (Chart 3). Wages and salaries rose 0.8% lifting their yr/yr increase to 9.4%, while supplements to wages and salaries rose 0.3% reflecting labor market tightness that is prompting firms to lift compensation to attract workers, and these wage gains are likely to remain elevated throughout the upcoming holiday retail season. The personal saving rate fell to 7.5%, reflecting the reduction in personal income.

* Nominal consumption rose 0.6%, with consumption of goods rising 0.5% and services up 0.6%, and in nominal terms these measures of consumption have all surpassed their pre-pandemic levels. However, in real terms personal consumption rose 0.3% m/m with services consumption rising 0.4% m/m. Although real personal consumption is above its pre-pandemic level, this partly reflects the shift in the composition of consumption to goods, with real services consumption still 1.7% below its Jan. 2020 level (Chart 4).

* Real goods consumption rose 0.1%, while durable goods consumption fell 0.5%, its fifth consecutive monthly decline as supply shortages and disruptions to distribution constrained production and consumption of goods. Consumption of motor vehicle and parts (-3.0%) and furnishings and durable household equipment (-0.6%) fell, while consumption of recreational goods and vehicles (+1.5%) rose. Real consumption of services ticked up 0.4% despite the delta variant driven surge in COVID-19 cases, with real consumption of food services and accommodation increasing a healthy 1%. As the impact of the delta variant wanes, economic activity in high contact, service sector industries should pick up.

PCE Price Index:

* The PCE price index rose 0.3% m/m lifting its yr/yr increase to 4.4% while core PCE, which excludes food and energy, rose 0.2% m/m and 3.6% yr/yr, its highest yr/yr increase since 1991 (Chart 5). Goods inflation remains elevated, rising 0.5% m/m and 6.1% yr/yr. Prices of used autos which surged earlier this year, picked up in September rising 2.9% m/m and 30% yr/yr, highlighting the persistence of supply chain disruptions that have exerted upwards pressure on prices. Housing prices, one of the largest components of the PCE price index, rose 0.4%, and have accelerated, rising 3.9% on a three-month annualized basis compared to 3.4% in August, as rising home prices and rents begin to reflect in the PCE price index.

Chart 1:

Chart, line chart, histogram Description automatically generated

Chart 2:

Chart, line chart Description automatically generated

Chart 3:

Chart, line chart Description automatically generated

Chart 4:

Chart, line chart Description automatically generated

Chart 5:

Chart, line chart Description automatically generated

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

Remarks regarding foreign investors. The preparation of this document is subject to regulation by US law. The distribution of this document in other jurisdictions may be restricted by law, and persons, into whose possession this document comes, should inform themselves about, and observe, any such restrictions. United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. Copyright BCM is a wholly owned subsidiary of Joh. Berenberg, Gossler & Co. KG (“Berenberg Bank”). BCM reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the BCM’s prior written consent. Berenberg Bank may distribute this commentary on a third party basis to its customers.

Member FINRA & SIPC

This email and any files or attachments transmitted with it may contain confidential or privileged information and are intended solely for the use of the intended recipient. If you are not the intended recipient, please do not copy, retain, disclose or use any part of the message or its attachments. Please notify the sender immediately by return email and destroy or delete any copies. Dissemination or use of this information by anyone other than the intended recipient is unauthorized and may be illegal. Communications by email cannot be guaranteed to be secure or error-free. Emails and their attachments are subject to being intercepted, becoming corrupted, getting lost or delayed, or may contain viruses. Therefore, neither the sender nor Berenberg Capital Markets LLC (BCM) accepts any liability for any errors or omissions in the content of this message or problems in its transmission, including those arising as a result of its transmission over the internet.

BCM does not assume liability for the correctness and completeness of all information given and/or attachments contained herein. The provided information has not been checked by a third party, especially an independent auditing firm. BCM explicitly points to the stated date of preparation. The information given can become incorrect due to passage of time and/or as a result of legal, political, economic or other changes. BCM does not assume responsibility to indicate such changes and/or to publish an updated document. Any document(s) or attachment(s) is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

In light of upcoming regulatory changes, please be informed that BCM will continue to share information with you until unsubscribe@berenberg-us.com receives your termination/deletion request. For more information about the General Data Protection Regulation (GDPR) and our privacy policies please refer to https://www.berenberg-us.com/legal-notice. BCM reserves all the rights in this communication. No part of this communication or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without BCMâs prior written consent.

The information contained herein and sourced may have been adopted from various news sources, for example, Bloomberg, Reuters, Street Account and various other sources. BCM does not claim accuracy, completeness, timeliness, suitability, or otherwise regarding all the information on the securities, stock markets, or developments referred to within. On no account should the Content be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgments. BCM is not responsible for any recipient(s) use of this information. This Content is not a solicitation or an offer to buy or sell any of the securities contained herein. This information does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of clients. Clients should consider whether any advice or recommendation in this Content is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of securities which may be referred to in this Content and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain securities.