Anemic wage growth in the US has been a central concern of economists in recent years, in no small measure due to its dampening effect on consumption. However, fast forward to the summer of 2018 and the situation is changing rapidly, driven by the tightening labour market.
With jobless claims in recent weeks having touched the lowest level since 1969, and companies reporting increasing difficulties finding skilled labour, employee bargaining power could come back with a vengeance.
Granted, we haven’t seen a decisive and broad-based uptick in wage inflation yet, but there are plenty of signs that workers feel more confident – including increased staff turnover, as employees voluntarily jump ship to better (more well-paid) opportunities. And, notably, the June increase in the unemployment rate – from the 18-year low of 3.8% in May to 4% – was largely attributable to people being enticed back into joining the labour force by the strong conditions, rather than any deterioration on the demand side.
We haven’t seen a decisive and broad-based uptick in wage inflation yet.
According to the US Labor Department’s Job Openings and Labor Turnover Survey, openings are at record levels and outstrip the available pool of unemployed – 6.64 million versus 6.56 million. The situation of small businesses is also instructive: according to the NFIB Research Center (National Federation of Independent Business), the number of small companies unable to fill positions rose to an all-time high of 36% in June. Sure, there’s been plenty of talk about the death of the Phillips curve (the textbook inverse relationship between unemployment and inflation) and although the data seems to point to a weakened correlation, we believe it may be premature to discard it completely.
The upshot for investors
From a macro perspective, wage growth does bring positives, most prominently in shoring up consumer confidence. This matters greatly in an economy where consumption accounts for around 70% of GDP. But, of course, this must be balanced with the potential implications for monetary policy and, from an investment perspective, corporate margins, as not all companies will be able to pass on higher wage costs. Combined with an expected strong GDP print for the second quarter, the taut labour market could galvanise the hawks on the Federal Open Market Committee to lift rates more aggressively. In turn, higher yields could make the so-called bond proxies unattractive for longer, despite having seen their valuations slashed over the past few years. That’s why we favour structural dividend growth names and continue to stress-test all investment ideas for a scenario of higher debt-servicing costs.