RIP Record Profit Margins

The bear case is that profit margins for the S&P 500 – now pushing almost 10% – cannot possibly be sustained, let alone expand from here. And thus, the logic goes, falling profit margins cannot possibly be good for stocks.

Unless they’re falling because companies are paying workers more and economic activity picks up to the point where reinvestment is necessary. In this context (of increased household income, spending and confidence), falling margins may not be the end of the world.

BusinessWeek writes on the burgeoning labor shortage (yes, I said shortage) this morning:

To hire 10 to 15 project coordinators this year, Texas builder Sabre Commercial has boosted pay 10 percent and added a 401(k) retirement plan. “It is an employee’s market,” says John Cyrier, co-founder and president of the 48-employee Austin-based company. “We are definitely seeing a labor shortage in Austin and central Texas. I see it only getting worse.”

Companies in cities across the U.S. are struggling to fill positions, with jobless rates in some metropolitan areas below the 5.2 percent to 5.6 percent level the Federal Reserve regards as full employment nationally. Competition for workers is prompting businesses to raise wages, increase hours for current employees, add benefits, and recruit from other regions.

Stories from the tighter labor market will grab more attention from the markets later this summer, and will soon overshadow weakness from housing stats in my opinion. As for what fuller employment may mean for stocks, who knows? It surely means a return to revenue growth for Corporate America but it also means a more assertive stimulus wind-down from the Fed. Do these cancel each other out?

Too soon to tell.


Help Wanted Signs Are Popping Up in U.S. Cities (BusinessWeek)


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