The tight US job market may have reached a new peak this year, and wage increases are soon to follow.
Last month, employers added a surprise 528,000 jobs — a staggering number that doubles Wall Street estimates and reflects the job market that has fully recovered from job losses from the pandemic — while the unemployment rate is 3.0 percent, according to the Bureau of Labor Statistics .5% has fallen.
“What you have right now is effectively peak employment,” ZipRecruiter CEO Ian Siegal told Yahoo Finance (video above). “It’s extremely difficult for employers to find people who have the right skills for their open positions. And a lot of them, rather than keep hiring, are basically trying to do more with the people they already have.”
As employers struggle to fill vacancies, this historically low unemployment rate has fueled wage growth. Average hourly wages rose 5.2% in July from a year earlier, and annual wage increases exceeded 5% every month this year, the Labor Department said.
“This has been an unprecedented series of increases in wages, increases in benefits and an increasing number of jobs offered with signing bonuses,” Siegal noted. “There were a number of perks for job seekers. And I’m telling you, if you’re listening to this right now, and you’re someone who’s thought about changing jobs, you have the greatest impact.”
As hot wage growth shows signs of peaking, it could ease pressure on corporate earnings.
“The tightest labor market in post-war history has contributed to wage growth that continues to surprise on the upside, although there have been signs of moderation recently,” wrote analysts at Goldman Sachs Research. “However, the recent drop in job vacancies and a downward trend in wage surveys are possible signs that the risk to gains from rising wages may have peaked.”
A recent note from Goldman Sachs pointed out that some sectors in the S&P 500 face greater earnings risks due to higher wages.
The story goes on
Although wage gains in July helped consumers keep spending in the face of more expensive goods, it also meant firms struggled with rising labor costs and business spending.
According to Goldman analysts, companies whose wage growth has accelerated by 100 basis points could contribute to a roughly 1% decline in S&P 500 earnings per share. However, the impact varies by industry.
Industrial and consumer stocks may face greater risk of stronger wage increases, while other sectors such as energy and real estate are more “isolated”, the analysts wrote. And with Q2 earnings season coming to an end, small-cap stocks could be more vulnerable to macroeconomic developments than large-caps.
A recruitment sign offers a $500 bonus outside a McDonald’s restaurant in Cranberry Township, Butler County, Pa., Wednesday, May 5, 2021. (AP Photo/Keith Srakocic)
The bank compiled a basket of 50 S&P 500 companies with the lowest labor cost-to-income ratios. On average, labor costs account for just 4% of the basket’s stock sales, compared to 14% for the S&P 500 as a whole.
According to Goldman Sachs, the basket outperformed stocks with high labor costs and the S&P 500 during periods of accelerating wage growth in 2017 and again in 2020, although it lagged in 2021.
Recent layoffs, hiring freezes and withdrawn job vacancies have signaled that the labor market is slowing, which in turn should lead to more subdued wage growth.
“Our economists expect the labor market to gradually rebalance and wage growth to moderate,” the analysts wrote. “However, if wage growth remains surprisingly strong, stocks with low labor costs should outperform.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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