This key metric shows consumers are building significant firepower

Joe Brusuelas is the Chief Economist at McGladrey. This article originally appeared on his excellent blog.  You can follow Joe on Tumblr and Twitter.

The update to the Employment Cost Index (ECI) through the end of the first quarter showed that wages and salaries of private sector workers increased at a 2.8 percent rate versus the cyclical average of 1.7 percent. Rising wages, a tightening labor market, improved inflation adjusted disposable income and an increased savings rate suggest U.S. households building a potent reserve of consumer firepower. When that firepower is released it will lift the gloomy and, in our estimation, erroneous economic outlook that has formed during the past few months.

The wage and salary data inside the ECI is more important than economic growth in moving the Fed’s discretionary-based reaction function. This data should provide some comfort to central bankers looking to take the next tentative step in what will be a lengthy process of normalizing policy.

While a June rate increase is off the table, a September hike is looking very given the wage, income and spending data. With the second quarter data that will be published in May through July likely to show a solid rebound in activity, forward-looking investors and firm managers should anticipate a modest rise in yields along the maturity spectrum during the next several weeks.

We are sticking with our non-consensus call that the 10-year Treasury yield will trade in a range on average between 2 to 2.25 percent this year. The primary risk to the policy and rate outlook at this point is the European sovereign debt crisis which appears to be heading toward a July 20 tipping point when €3.5 billion in bonds owed by the Greeks to the European Central Bank matures.

Improving wage and employment data during the past year is the foundation of our estimate that private sector workers will likely see a 3 percent rise in wages and salaries in 2015. We expect that the lagged impact of falling gasoline prices, which has been the primary factor in the 3.3 percent increase in real disposable income, will bolster household consumption and the economy going forward.

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