Apr 17, 2019

The low-wage benefit for U.S. companies is over

Illustration: Rebecca Zisser/Axios

A growing number of U.S. companies are saying higher wages weighed on first quarter profits or will have a negative impact in coming quarters.

Why it matters: As workers finally start to see pay increases, one of the biggest drivers of high profit margins is under threat and Bridgewater, the world's largest hedge fund, warns corporate profits that have fueled the stock market boom may be peaking.

In the last 20 years union membership dropped and companies have had access "to pools of cheaper foreign labor and advancing automation technology," Bridgewater writes — all factors that have contributed to stagnant wage growth.

  • The economic boom has started to shift the balance of power in favor of workers. Unemployment is close to a half-century low and companies will need to up pay to attract would-be employers.
  • Higher wages haven't hit all-time high profit margins yet, as we've reported. "U.S. corporate profits as a percent of GDP averaged about 8% in the 20 years leading up to 2000, but have since risen by almost 30%, averaging 10.5%," according to Jim Paulsen, chief investment strategist at The Leuthold Group.

But here's what executives are saying, via earnings calls this quarter:

  • "It still feels like to us that there is ... more wage pressure than there has historically been," AutoZone CEO Bill Rhodes said.
  • "FedEx Ground operating results were negatively impacted by the inflationary impact of the tight labor market on our purchase transportation rates and employee wages," FedEx CFO Alan Graf said.

What to watch: The big question is whether companies can continue "to absorb higher wage bills without raising prices," as as Bloomberg's Matt Boesler points out. That could help even out profit margins.

  • That hasn't happened yet. We haven't seen a significant pick-up in inflation, bolstering the Fed's case to hold off on hiking interest rates and maybe even cut rates.

Go deeper:

Go deeper

Coronavirus spreads to more countries, and U.S. ups its case count

Data: The Center for Systems Science and Engineering at Johns Hopkins, the CDC, and China's Health Ministry. Note: China numbers are for the mainland only and U.S. numbers include repatriated citizens.

The novel coronavirus continues to spread to more nations, and the U.S. reports a doubling of its confirmed cases to 34 — while noting those are mostly due to repatriated citizens, emphasizing there's no "community spread" yet in the U.S. Meanwhile, Italy reported its first virus-related death on Friday.

The big picture: COVID-19 has now killed at least 2,251 people and infected almost 77,000 others, mostly in mainland China. New countries to announce infections recently include Israel, Lebanon and Iran.

Go deeperArrowUpdated 2 hours ago - Health

Wells Fargo agrees to pay $3 billion to settle consumer abuse charges

Clients use an ATM at a Wells Fargo Bank in Los Angeles, Calif. Photo: Ronen Tivony/SOPA Images/LightRocket via Getty Images

Wells Fargo agreed to a pay a combined $3 billion to the Justice Department and the Securities and Exchange Commission on Friday for opening millions of fake customer accounts between 2002 and 2016, the SEC said in a press release.

The big picture: The fine "is among the largest corporate penalties reached during the Trump administration," the Washington Post reports.