Wage pressures coming? U.S. companies start to sound the alarm

NEW YORK (Reuters) - Early indications of wage pressures in pockets of corporate America have begun emerging in recent weeks, suggesting labor costs could be a bigger headwind for U.S. companies in 2016.

Merchandise is moved at a Wal-Mart Stores Inc company distribution center in Bentonville, Arkansas June 6, 2013. REUTERS/Rick Wilking

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 PHM.N 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 VTR.N and Welltower HCN.N 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.

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 UAL.N, Delta DAL.N and Southwest LUV.N 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 HCA.N 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 UHS.N 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