US has 'effective peak employment', bringing high wage growth into focus

US has ‘effective peak employment’, bringing high wage growth into focus

The tight labor market in the US may have reached a new high this year and wage growth will soon follow.

Last month, employers added a surprising 528,000 jobs — a staggering figure that doubled Wall Street’s estimates and reflected the labor market fully recovered from the pandemic job loss — while the unemployment rate fell to 3.5%, according to the Bureau of Labor Statistics.

“What you have now is basically a spike in 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 recruit, are actually trying to do more with the people they already have.”

As employers compete to fill vacancies, that historically low unemployment rate has fueled wage growth. Average hourly wages rose 5.2% in July from a year earlier, and annual wage increases have been more than 5% per month this year, the Labor Department said.

“This is an unprecedented array of rising wages, increasing benefits, increasing number of jobs offered with signing bonuses,” Siegal noted. “There’s a range of benefits for job seekers. And I’m telling you, if you’re listening to this right now and you’re someone who’s considering a job change, you’ve got maximum leverage.”

With high wage growth showing signs of peaking, that could ease pressure on corporate earnings.

“The tightest labor market in post-war history has contributed to wage growth that continues to surprise positively, although there have been recent hints of moderation,” Goldman Sachs Research analysts wrote. “However, the recent decline in job openings and a downward inflection in wage surveys are potential signs that the risk to earnings from rising wages has peaked.”

A recent note from Goldman Sachs pointed out that some industrial sectors in the S&P 500 are at greater risk to their earnings from higher wages.

While wage increases in July helped consumers continue spending in the face of more expensive goods, it also meant businesses faced rising labor and operating costs.

According to Goldman analysts, companies that have seen wage growth accelerate by 100 basis points could contribute to a decline in S&P 500 earnings per share of about 1%. However, the impact differs per sector.

Industrial and consumer stocks may be more at risk from sharper wage increases, while other sectors such as energy and real estate are more “isolated,” the analysts wrote. And as the second quarter earnings season draws to a close, small-cap stocks may be more vulnerable to macroeconomic developments than large-cap stocks.

A hiring board offers a $500 bonus outside a McDonalds restaurant, in Cranberry Township, Butler County, Pa., Wednesday, May 5, 2021. U.S. employers posted a record number of available jobs in March, clearly illustrating companies' desperation to hire more. people take as the economy grows.  Still, the total number of jobs rose only modestly that month, according to a Labor Department report released on Tuesday, May 11 (AP Photo/Keith Srakocic)

A hiring sign offers a $500 bonus outside a McDonald’s restaurant, in Cranberry Township, Butler County, Pennsylvania, Wednesday, May 5, 2021. (AP Photo/Keith Srakocic)

The bank assembled a basket of 50 S&P 500 companies with the lowest labor cost to income ratio. On average, labor costs represent only 4% of revenue for basket stock, compared to 14% for the S&P 500 overall.

According to Goldman Sachs, the basket outperformed high labor cost stocks and the S&P 500 during periods of accelerated wage growth in 2017 and again in 2020, though lagging in 2021.

Recent layoffs, staff freezes and job vacancies have indicated that the labor market is slowing, which in turn should lead to more subdued wage growth.

“Our economists expect the labor market to gradually return to equilibrium and wage growth to moderate,” the analysts wrote. “However, if wage growth remains surprisingly strong, stocks with low wage costs should outperform.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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