Rising Wages = Shrinking Corporate Profit Margins … And Falling Stock Prices?

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by John Rubino, Dollar Collapse:

Today’s Wall Street Journal contains a couple of charts that illustrate a relationship that’s not getting much media attention these days: The fact that tightening labor markets are forcing companies to raise wages, in the process squeezing their own profit margins.

Historically this margin compression has been either a cause of or contributor to cyclical turning points — in other words it coincides with recessions and equity bear markets.

The first chart shows wages rising after an unusually long period in which they didn’t rise much at all. They’ve still yet to achieve the velocity of previous recoveries, but anecdotal evidence of desperate employers raising wages and lowering standards (see herehere and here) is now so widespread that continued wage gains are pretty much baked into the cake.

wage growth profit margins

What has this meant for corporate profit margins in the past? Big drops, as higher wages combined with an inability to raise prices commensurately left corporations with less money at the end of the day.

S&P 500 earnings profit margins

Since a share of stock is simply a claim on a portion of a public company’s earnings, falling profits obviously lead to falling share prices:

S&P 500 profit margins

Here’s an excerpt from the WSJ article:

Rising wages are beginning to eat into the profits of some U.S. companies.

Businesses from dollar stores to hotel operators to fast-food chains have warned in recent months that higher labor costs have been a drag on their profits—a potential headwind for the nine-year stock-market rally as it struggles for momentum ahead of the second-quarter earnings season.

Average hourly earnings increased 2.7% in June from a year earlier, according to the Labor Department’s monthly jobs data released Friday. Although that is below the 2.8% economists expected, wages have risen at least 2.5% for 16 of the past 17 months, a faster pace than recorded earlier in the economic expansion.

That is good news for U.S. workers who have seen tepid wage increases over the past few years and may benefit some businesses as consumers become more willing to open their wallets for discretionary purchases.

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