The tight US labor market may have hit a new high this year with wage growth soon to follow.
Employers added a surprise 528,000 jobs last month, an impressive number that doubled Wall Street estimates and reflected that the labor market fully recovered from pandemic job losses, while the unemployment rate fell to 3.5%, according to the Bureau of Labor Statistics.
“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 jobs. And many of them, instead of continuing to hire, are basically trying to do more with the people they already have.”
As employers struggle to fill job vacancies, this historically low unemployment rate has boosted wage growth. Average hourly earnings rose 5.2 percent in July from a year earlier, and annual wage gains topped 5 percent each month this year, the Labor Department said.
“This has been an unprecedented series of increased wages, increased benefits, increased number of jobs offered with signing bonuses,” Siegal noted. “There’s been a number of benefits that have come to job seekers. And I’m telling you, if you’re listening to this right now and you’re someone who’s been thinking about changing jobs, you’re at maximum leverage.”
With hot wage growth showing signs of peaking, this could ease pressure on corporate bottom lines.
“The tightest labor market in postwar history has contributed to wage growth that continues to surprise on the upside, although there have been signs of moderation recently,” analysts at Goldman Sachs Research wrote. “However, the recent decline in job openings and a downward turn in wage surveys are potential signs that the risk to benefits from rising wages may have peaked.”
A recent note from Goldman Sachs noted that some S&P 500 industry sectors have faced greater risks to their earnings due to higher wages.
The story continues
While wage gains in July helped consumers continue to spend on more expensive goods, it also meant that businesses grappled with rising labor costs and business expenses.
According to Goldman analysts, companies that have seen wage growth accelerate by 100 basis points could contribute about a 1% reduction in earnings per share to the S&P 500. The impact, however, varies by sector.
Industrials and consumer stocks could be more at risk of sharper wage increases, while other sectors such as energy and real estate are more “insulated,” the analysts wrote. And with Q2 earnings season winding down, small-cap stocks may be more vulnerable to macroeconomic developments than large-caps.
A recruiting 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 assembled a basket of 50 S&P 500 companies with the lowest ratio of labor costs to income. On average, labor costs make up just 4% of earnings for the basket’s stocks, compared with 14% for the S&P 500 overall.
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, according to Goldman Sachs.
Recent layoffs, hiring freezes and rescinded job offers have signaled that the labor market is slowing, which in turn should lead to more moderate 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, low-labor-cost stocks should outperform.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
Click here for the latest economic news and indicators to help you with your investment decisions
Read the latest financial and business news from Yahoo Finance