The Employment Cost Index measures the cost of labor to business
The US Employment Cost Index (or ECI) is prepared quarterly by the Bureau of Labor Statistics. It’s the counterpart to the Consumer Price Index (or CPI). One way of thinking about ECI is that it’s the wage side of the wage-price spiral, while CPI is the price side.
The ECI is an input into government salaries and is often cited by the Federal Reserve when setting policy.
Employment costs increased 0.7% in the quarter ended March 31, 2015. This was a small increase from the December quarter. Wages and salaries, which make up about 70% of the index, increased 0.7%, while benefit costs increased 0.6%.
Over the past 12 months, compensation costs for civilian workers increased 2.6%, while benefit costs increased 2.7%. For private industry workers, compensation increased 2.8%, while benefits increased 2.6%.
Impact on mortgage REITs
If benefit costs are rising faster than wages and salaries, then workers are becoming more expensive. But they’re not receiving the full benefit of that increase. This increases employment costs, but you won’t see the big uptick in consumption.
The REITs most exposed to this are non-agency REITs like Two Harbors (TWO), because they invest in mortgage-backed securities (or MBS) not backed by the federal government. Others exposed to this are REITs with large portfolios of mortgage servicing rights, such as Nationstar (NSM).
Servicers are required to make principal and interest advances to security holders, even if the borrower doesn’t pay. They can find themselves with cash flow problems if there’s a big shock. In fact, after the financial crisis, big agency REITs like Annaly (NLY) and American Capital Agency (AGNC) rallied, while REITs with large MSR (mortgage servicing rights) portfolios got hammered.
Investors interested in trading in the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate ETF (REM). Investors interested in making directional bets on interest rates should look at the iShares Barclays 20+ Year Bond Fund (TLT).