Official earnings season in the US will kick off with Alcoa after the close of trading on Tuesday, and here’s one item that economy-watchers will be minding as companies report in the coming weeks.
First from RBC:
In our opinion, the sharp increase in productivity-adjusted labor costs now in tow could provide a fresh source of margin pressure. This, relative to the headwinds already cited by companies throughout the “warnings season”, represents a double-edged sword: on the one hand, it would reflect a more self-sustaining economic recovery; on the other, it could dampen expectations of future earnings growth and translate into lower valuation multiples.
If this turns out to be true, then it’s obviously a far better reason for earnings growth to slow than, say, falling demand and a broader economic slowdown. And a bit of wage-fuelled inflation is clearly healthier for the economy than the commodities-driven variety, though one worry is that too much will lead to prematurely tightened monetary policy.
But there’s enough slack in labour markets at the moment that it’s likely we’re pretty far from that stage, and today’s JOLTS report mostly confirmed that openings, hires, and quits have all continued to increase (through February) at a gentle incline.
More detail below from Deutsche Bank:
The March jobs report showed the three-month annualized change in average hourly earnings (+2.4%) is at an eight-month high, and unit labor costs are now at a post-recession peak (+3.1% year-on year).
Past precedent shows that wage inflation is generally an important precursor to a lasting increase in consumer inflation, so the near-term labor data will contain important information about the medium-term outlook for both wage and consumer inflation.
Wage inflation was acutely curtailed by the substantial labor dislocation over the past five years, but important leading indicators suggest this stability is starting to erode. Just as inflation is generally a lagging indicator of overall economic activity, labor inflation is a lagging indicator of activity in the labor market.
The pace of job creation already suggests upward pressures are building, as illustrated in the following chart.
Even sustained hiring near March levels (+121k) is consistent with further ULC acceleration. Thus, the jobs data imply that wage pressures are likely to sow the seeds of faster consumer inflation over the medium term.