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U.S. is at 'effectively peak employment,' bringing hot wage growth into focus

The tight U.S. labor market may have reached a new peak this year with wage growth soon to follow.

Last month employers added a surprise 528,000 jobs — a stunning figure that doubled Wall Street estimates and reflected the labor market fully recovered from pandemic job losses — while the unemployment rate ticked down to 3.5%, according to the Bureau of Labor Statistics.

"What you have right now is effectively peak employment," ZipRecruiter CEO Ian Siegal told Yahoo Finance (video above). "It is extremely difficult for employers to find people who have the right skills for their open jobs. And a lot of them rather than continuing to recruit are basically trying to do more with the people that they already have."

As employers battle to fill job vacancies, that historically low jobless rate has propelled wage growth. Average hourly earnings climbed by 5.2% in July from a year earlier, and the annual wage gains exceeded 5% each month this year, the Labor Department said.

"This has been an unprecedented run of increasing wages, increasing benefits, increasing number of jobs offered with signing bonuses," Siegal noted. "There has been an array of perks that have come to job seekers. And I tell you, if you are listening to this right now and you are someone who has been contemplating changing jobs, you are at peak leverage."

With hot wage growth showing signs of peaking, that could alleviate pressure on companies' bottom lines.

"The tightest labor market in postwar history has contributed to wage growth that continues to surprise to the upside, although there have been recent hints of moderation," the Goldman Sachs Research analysts wrote. "However, the recent decline in job openings and a downward inflection in wage surveys are potential signs that the risk to profits from rising wages may have peaked."

A recent Goldman Sachs note pointed out that some industry sectors in the S&P 500 have faced greater risks to their earnings due to higher wages.

Although the July wage gains helped consumers continue spending in the face of pricier goods, it also meant companies dealt with rising labor costs and business expenses.

According to Goldman analysts, companies that have seen wage growth accelerate by 100 basis points could contribute to a roughly 1% reduction in S&P 500 earnings per share. The impact, however, varies across sectors.

Industrial and consumer stocks could be more at risk of sharper wage increases whereas other sectors such as energy and real estate are more "insulated," the analysts wrote. And with second-quarter earnings season wrapping up, small-cap stocks may be more vulnerable to macroeconomic developments than large-caps.

A hiring sign offers a $500 bonus outside a McDonalds restaurant, in Cranberry Township, Butler County, Pa., Wednesday, May 5, 2021.  U.S. employers posted a record number of available jobs in March, starkly illustrating the desperation of businesses to hire more people as the economy expands. Yet total job gains increased only modestly that month, according to a Labor Department report issued Tuesday, May 11. (AP Photo/Keith Srakocic)
A hiring sign offers a $500 bonus outside a Mcdonald's restaurant, in Cranberry Township, Butler County, Pa., Wednesday, May 5, 2021. (AP Photo/Keith Srakocic) (ASSOCIATED PRESS)

The bank put together a basket of 50 S&P 500 companies with the lowest ratio of labor costs to revenues. On average, labor costs account for just 4% of revenue for the basket's stocks, compared to 14% for the S&P 500 overall.

According to Goldman Sachs, the basket outperformed stocks with high labor costs and the S&P 500 during periods of accelerating wage growth in 2017 and again in 2020, though it lagged in 2021.

Recent layoffs, hiring freezes, and rescinded job offers have signaled that the job market is slowing, which in turn should lead to more subdued wage growth.

"Our economists expect the labor market to gradually rebalance and for wage growth to moderate," the analysts wrote. "However, if wage growth remains surprisingly strong, low labor cost stocks should outperform."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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