As the market grapples for momentum before companies report second-quarter earnings, rising wages may prove to be a headwind: Labor Department data indicates that the average hourly earnings rate rose 2.7 percent in June from the prior year. And, overall, wages have climbed a minimum of 2.5 percent for 16 of the last 17 months, The Wall Street Journal reported.
While the news is good for workers, the higher wages may be a challenge for companies that are dealing with trade tensions and inflation. Retailers such as quick-service restaurants (QSRs) and hotel owners have said that higher labor costs are impacting their bottom lines, and Goldman Sachs economists estimate that each percentage point that labor-cost inflation rises will send the earnings of S&P 500 companies down by 0.8 percent. As Westfield Capital Management President and Chief Executive William Muggia told WSJ, “At the end of the day, I haven’t heard this many CEOs talk about shortages in skilled labor and wage increases to attract talent in a long time – in at least a decade.”
The news comes as the payrolls at U.S.-based private companies increased less than expected in June, at the same time that the number of people in the U.S. who filed for unemployment has increased unexpectedly. According to a prior report in Reuters, despite the unexpected increase in unemployment, the labor market is considered to be near or at full employment, with the unemployment rate of 3.8 percent marking an 18-year low.
So far this year, the rate of unemployment has dipped three-tenths of a percentage point and is close to the Federal Reserve’s forecast of 3.6 percent by the end of 2018. Reuters cited the ADP National Employment Report, which showed that private companies hired 177,000 workers in June — fewer than the 190,000 the market was anticipating. Private payrolls increased 189,000 in May. According to Reuters, the unemployment rate uptick could be due to the tough time companies are having in finding qualified workers.