Get ready for the biggest month of US economic data in years

Ahead of Thursday’s Q2 GDP report, Michelle Meyer at Bank of America Merrill Lynch said the US economy was facing a “moment of truth.”

But that was just a sideshow.

On Friday, one of the biggest stretches of US economic data in recent memory will really get underway with the report of the employment cost index.

What is the employment cost index? It’s a measure of wages that factors in not just money paid to employees, but employer costs for employee benefits. In short, it gives you a fuller idea of how people are being compensated for their work.

On April 30, the first quarter ECI number showed a clear uptick in wages, as the index grew 0.6% over the prior quarter and 2.6% over the prior year to start 2015.

Average hourly wages, meanwhile, were up 2% over the prior year in June and have been generally lacklustre over the last several years.

On Wednesday, the Federal Reserve’s latest monetary policy statement saw the Fed keep interest rates pegged at 0%-0.25%, as expected.

But many in the market are eyeing the Fed’s September meeting for the central bank’s first rate hike in 9 years.

For this to happen, however, we’re going to need to see signs of wage growth and continued improvement in the labour market over the next month.

In its policy statement on Wednesday, the Fed said it expects it will raise rates, “when it has seen some further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.”

On the inflation front, the Fed got reasonably encouraging news on Thursday as the first estimate of second quarter GDP showed “core” PCE, a measure of inflation that strips out the more volatile cost of food and gas, rose 1.8% in the second quarter.

This is still below the Fed’s 2% target, but there seems potential that the Fed could become confident inflation will return to its target over the “medium term.”

Signs of wage growth will also certainly be a part of the Fed gaining confidence in its inflation outlook, and Friday is the most important figure in that arena we’ll get before the September 16-17 meeting. For unless wages go up, we’re going to have trouble putting together the most basic ingredients for inflation: too much money chasing too few goods.

After Friday’s ECI report, we’ll get the July jobs report in a week and then, on September 4, the August jobs report.

In a note on Wednesday, Citi’s Steve Englander said that if these upcoming jobs reports show nonfarm payrolls grow by at least 210,000 — with the unemployment rate correspondingly dropping further — the Fed will likely have reason to raise rates.

And so this upcoming stretch is simply as big as it gets.

Via Morgan Stanley, here’s a brief calendar to keep handy as we head into a run of data that will define whether the coming weeks really are the end of the Fed’s post-crisis era of zero interest rates, or whether the September meeting comes and go with the Fed yet again doing nothing.

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