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 Over the course of the latest corporate earnings reporting season,
executives from nearly 20 S&P 500 companies have flagged labor
costs, shortages or wage pressure as headwinds.
That is up from about a dozen companies who singled out these
concerns a quarter earlier and a year ago, a sign that more
companies are talking about wage issues, an analysis of earnings
season comments by Thomson Reuters showed.
Wage inflation has been largely nonexistent in the plodding economic
expansion out of the Great Recession, a key factor behind the robust
recovery in company profits over the past six years even as sales
growth has remained muted.
Now, though, a combination of rising U.S. payrolls, political
pressures to increase state and federal minimum wages and some
industry-specific issues, such as expensive labor contracts in the
airlines and automakers and labor shortages in construction, could
finally be gelling to force up labor costs.
"The conditions are beginning to be in place for something that has
been languishing really since the bottom of the recession," said
Mark Dawson, chief investment officer at Rainier Investment
Management in Seattle. "We're closer to the point where wage
pressures in certain areas are increasingly going to be seen. I
would expect it to be more of an issue next year."
Wage concerns that started popping up a year ago in a handful of
industries such as fast food restaurants and retailers have
persisted and are spreading to a more diverse range of companies,
including homebuilding and construction companies and airlines.
Wal-Mart <WMT.N>, the world's largest retailer, has said next year's
earnings could decline as much as 12 percent, partly because of
costs to raise entry-level wages.
Executives at Shake Shack <SHAK.N> have said it plans to increase
menu prices in January, though they do not expect those higher
prices to fully offset higher labor costs.
For home builders, tight labor markets have been a constraint.
"No question, labor is tight. Reports coming out of other builders,
we're not immune to it," David Auld, D.R. Horton's president and
chief executive said in a Nov. 10 conference call.
The company said it has been able to offset the higher costs so far
through its prices.
Among other homebuilders citing labor as an issue, PulteGroup
reported a quarterly profit decline and said construction delays
from labor shortages dampened sales. Also, Chief Financial Officer
Bob O'Shaughnessy said during the earnings call Pulte is paying more
to attract and retain labor.
Similarly, real estate investment trusts Ventas and Welltower
mentioned concerns about wage pressures in the recent reporting
period.
"It's something that we are very focused on," Scott Brinker,
Welltower's chief investment officer, said in a conference call.
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Some industries are expecting higher labor costs from renewed
contracts, such as the case with airlines.
Contract negotiations are in the works for pilots at major U.S.
airlines United, Delta and Southwest that could result in higher
wages and costs in 2016. Hospital providers, too, are citing higher
employee costs.
When it warned on results last month and cited higher labor costs,
HCA Holdings triggered a selloff in the hospital provider space. Its
labor costs as a percentage of sales increased in the third quarter
from a year ago.
Universal Health Services CFO Steve Filton, though, said the
industry was not yet experiencing the same wage pressure as it was a
decade ago.
To be sure, plenty of companies are still laying off workers to cut
costs further, especially in the energy sector, which is hard hit by
falling oil prices.
Last month, nonfarm payrolls recorded their largest gain since
December 2014, while the unemployment rate fell to a 7-1/2-year low
of 5.0 percent.
The number of unemployed persons to job openings is as low as it was
in 2007, according to U.S. government data.
Moreover, the debate over whether to raise the minimum wage has been
gaining steam and is a hot topic among U.S. presidential candidates,
suggesting the issue is likely to persist at least through next
year's election.
The current federal minimum wage is $7.25 an hour, compared with
proposals for minimums of $12 to $15 an hour.
"It's really a combination of more competition for low-wage workers,
and the fact that there's pressure to raise those wages in a number
of jurisdictions and just in general," said Rick Meckler, president
of investment firm LibertyView Capital Management in Jersey City,
New Jersey.
(Reporting by Caroline Valetkevitch; additional reporting by Jeffrey
Dastin; editing by Linda Stern)
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