Labor Costs Accelerate, Threatening to End U.S. Earnings Streak

[EJ]

Labor Costs Accelerate, Threatening to End U.S. Earnings Streak
August 14, 2006 (Bloomberg)

The price of labor has taken a sudden jump and is likely to keep climbing, threatening to end the longest U.S. corporate profit boom in more than 40 years.

``You are starting to see wages tick up,'' says Henry McVey, chief investment strategist with Morgan Stanley in New York. ``We're at the point in the cycle when margins have hit peak levels.''

Labor costs have shot up 3.2 percent over the past 12 months, after average increases of just 0.8 percent a year from 2000 to 2005, the Labor Department reported last week. Companies will have a hard time raising prices to recover those costs, as weakening consumer demand slows the economy for the rest of this year. That means profits will take a hit.

``Labor cost increases at this pace would be alarming from an inflation perspective if growth were not slowing,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. ``But it is, so the alarm should sound over corporate earnings forecasts instead.'' He expects earnings among companies in the Standard & Poor's 500 to be down 10 percent by the fourth quarter of 2007.

AntiSpin: A predicted stagflationary scenario appears to be coming to pass. How far will it go? As far as modeled in Inflation is Dead! Long Live Inflation! Five Year, 100% Inflation Scenario? The scenario is predicated on an increase in nominal incomes to keep property owners solvent as the economy slows. At the time I proposed it in 2005, a friend politely told me it was "nuts." Given recent reported wage trends, it's time to put the 100% inflation scenario forward to the iTulip.com community for further discussion.

[akrowne]

Re: Labor Costs Accelerate, Threatening to End U.S. Earnings Streak

What's funny is that the labor-cost increases are still below inflation, so everyone loses.

Companies also have increasing producer price costs, as well as falling sales. This is going to be a huge triple-whammie to corporate profits.

Corporate profits have peaked--look out below!

[Charles Mackay]

Re: Labor Costs Accelerate, Threatening to End U.S. Earnings Streak

Can wages really go up in "real" terms when we are already at a 10 to 30 x times multiple of the competing countries that we import from?

[Christoph von Gamm]

Re: Labor Costs Accelerate, Threatening to End U.S. Earnings Streak

Can wages really go up in "real" terms when we are already at a 10 to 30 x times multiple of the competing countries that we import from?

Wages is not the real issue, it is productivity and productivity increase: Example: Germany is the world's biggest net exporting country - before Japan, China, India and the US - with similarly high labor costs per employee than in the US, and depending upon exchange rate even higher. But the costs per item produced (produtivity) are significantly less (example: BMW manufacturing in Munich, Germany, quite an expensive place to have a factory in Europe compared i.e. to Detroit MI, p.ex GM or Ford). Ford needs three times the workers to produce a Lincoln Town Car compared to a BMW 5 or 7 series, which ontop of that bases on the same spare parts and platforms... BMW as a result makes a profit despite having the workers a 35 hour week and paid overtime etc.

An average BMW worker has three to four years of apprentice and specialisation, an average Ford worker has done twelve weeks of apprentice... guess who knows better what works and what not...

Similar story you can see within the GM Corp. with Opel, Saab and Chevrolet.

Labour is an important factor but more importantly is how long it takes you to do something, how many assistants you need to get something done etc etc. Producitvity can increase by introducing new processess, then of course this will firstly release employees as those new processes usually demand LESS labor than before.

So the question is definitely in the US about changing processes, thinking smarter getting workers educated better.

[Jim Nickerson]

Re: Labor Costs Accelerate, Threatening to End U.S. Earnings Streak

Very good. Very insightful comments, Chris.

[EJ]

Re: Labor Costs Accelerate, Threatening to End U.S. Earnings Streak

Wages is not the real issue, it is productivity and productivity increase: Example: Germany is the world's biggest net exporting country - before Japan, China, India and the US - with similarly high labor costs per employee than in the US, and depending upon exchange rate even higher. But the costs per item produced (produtivity) are significantly less (example: BMW manufacturing in Munich, Germany, quite an expensive place to have a factory in Europe compared i.e. to Detroit MI, p.ex GM or Ford). Ford needs three times the workers to produce a Lincoln Town Car compared to a BMW 5 or 7 series, which ontop of that bases on the same spare parts and platforms... BMW as a result makes a profit despite having the workers a 35 hour week and paid overtime etc.

An average BMW worker has three to four years of apprentice and specialisation, an average Ford worker has done twelve weeks of apprentice... guess who knows better what works and what not...

Similar story you can see within the GM Corp. with Opel, Saab and Chevrolet.

Labour is an important factor but more importantly is how long it takes you to do something, how many assistants you need to get something done etc etc. Producitvity can increase by introducing new processess, then of course this will firstly release employees as those new processes usually demand LESS labor than before.

So the question is definitely in the US about changing processes, thinking smarter getting workers educated better.

Great point and seems paradoxical. High wages are often associated with inflation caused by an employment rate that's running above a magical "optimal" rate of productivity and GDP growth. But nations with labor policies that tend to lead to high wages create incentives for firms to invest in capital equipment to be more productive, that is, make more goods per unit of labor. I recall that an Airbus takes something like 1/2 to 1/3 as many workers to produce as an equiv. Boeing.

Can high labor costs actually drive higher productivity?