WASHINGTON (MarketWatch) — It doesn’t happen often, but the first look at fourth quarter gross domestic product report on Friday may play second fiddle to the quarterly employment cost index, a relatively lesser-known report on workers’ wages and benefits.
“The employment cost index could be more important than GDP in the collective mind of the financial markets,” said Joseph Lavorgna, chief U.S. economist at Deutsche Bank, in a recent research note.
That’s because wages are key to the outlook for when, or if, the Federal Reserve will lift interest rates.
With the real economy growing strongly, only low and declining inflation is keeping the Fed “patient” in holding short-term interest rates at zero.
The U.S. central bank has signaled inflation doesn’t have to be at the its 2% annual target rate for it to begin lifting rates. But Fed Chairwoman Janet Yellen said she and her colleagues want to be “reasonably confident” inflation is moving higher before taking that step.
Markets are focused on when the Fed’s patience may wear out. And signs of wage growth may just give the Fed confidence to move.
Economists polled by MarketWatch predict employment costs will rise 0.6% in the third quarter after a 0.8% gain in the third quarter and a 0.6% rise in the third quarter. This should push overall employment costs up to 2.4% in the fourth quarter, low by historical standards but still the fastest pace since 2008.
This would contradict another measure of wages, average hourly earnings, which was a major disappointment in the last jobs report. Average hourly earnings fell 0.2% in December from the prior month for the first time since July 2013. This brought the year-on-year gain to 1.7%.
Tom Porcelli, chief U.S. economist at RBC Capital Markets, said the average hourly earnings report is a “woeful indicator” and that the employment cost index is much broader and a better measure.
On fourth quarter GDP, the government is likely to report the economy expanded at a 3.2% annual clip from October to December, according to economists polled by MarketWatch. This follows growth at a 5% rate in the third quarter and a 4.6% rate in the second quarter.
While the fourth quarter will be slower, it is a pace “more indicative of the genuine, but moderate, acceleration in the U.S. economy over the past 12-18 months,” said economists at RBS Securities.
Consumer spending, the biggest contributor to GDP growth, probably grew faster than the 3.2% pace in the third quarter.