Though only a handful of S&P 500 SPX, -0.06% companies have reported first-quarter earnings so far, nearly half of those firms have anecdotally, or otherwise, referred to wages and labor costs as “a fact that either had a negative impact on earnings in [the first quarter] or [one that] is expected to have a negative impact on future earnings,” according to John Butters, senior earnings analyst at FactSet, in a research note.
While wage growth by some measures, like average hourly earnings, remain near historic averages, Virgadamo warns that underlying data, which show the broadening of wage gains and the acceleration of overall compensation growth, will combine with an apparent trend of slowing revenue growth to crimp margins, a development that could result in employees being laid off.
Nevertheless, Virgadamo cites the growing share of U.S. industries facing wage pressures as worrisome. “As of February 53.6% of industries were experiencing above-trend wage growth,” he wrote. “That compares with 46.9% in February a year ago, and an average level of 42% that prevailed throughout the expansion to date.”
Another reason for investors to be skeptical of rising wages is the personal savings rate. “The bull case attached to rising wages is that higher wages can spur consumer spending and offer sales growth support for consumer facing companies,” wrote Virgadamo, but in recent years rising wages have been matched commensurately with rising savings. During recent years, “ an increasing percentage of higher wages are being saved.
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