- Continuing evidence that labor market tightness is leading to labor cost acceleration, especially among blue-collar occupations;
- Strong job growth suggests a strong momentum going forward and that workers will continue to get harder to find in the US; and
- Growing evidence in recent months of faster labor cost growth spilling into producer prices.
As a result, investors’ perception that the labor market is tight and tightening, and that higher inflation is around the corner, sunk in more than at any other time during this economic expansion. The perception that accelerating labor costs will hurt corporate profits and that the Fed may become more aggressive in raising interest rates rattled investors. Some are concerned that the next recession can’t be that far off when the economy reaches such a tight labor market. Investors should be rattled. Not because a recession is coming any time soon, but because a tightening labor market can be bad for stock prices even during an expansion.
The defining feature of the US labor market in the current period is that with almost no growth in the working-age population, even modest employment growth is enough to tighten the labor market. And employment growth is much better than modest. By 2019, after one more year of solid growth, the US unemployment rate is likely to be its lowest since the 1960s, with many industries and locations suffering from acute labor shortages. In such an environment, accelerating labor costs and higher labor turnover are likely to squeeze corporate profits and make the Fed raise interest rates more aggressively. Stock prices may suffer.
As we highlight below, C-Suite Challenge: Reinventing the Organization for the Digital Age touches upon the race for talent among, other concerns shared among the C-suite. We hope you find our insights, drawn from rich and robust research, to be helpful and informative.