RBC Capital Markets chief equity strategist Jonathan Golub sat down with Business Insider CEO Henry Blodget on this week’s episode of The Bottom Line. Golub talks about how wage growth is a market risk that is often overlooked. Following is a transcript of the video.
Henry Blodget: You’re not concerned that earnings growth ultimately will stall because wage pressures will rise and companies will pay folks more?
Jonathan Golub: I am. Actually, we put a note out on this a couple of days ago when we said that while there’s a million arguments that people are making to raise their caution, there are two things that we see as a potential risk that for some reason others aren’t paying attention to. And one of them is this issue of rising wages. Now the first thing happens when we have a 4.4% unemployment rate which is really terrific and that pushes wages higher and that gets people to spend more money so that’s a positive but at some point, it squeezes profit margins for companies. We think that’s going to be a problem but probably in 2018 and 2019, and we think next year we’re going to hear a lot more of a debate on that issue but it’s just too early and margins are expanding pretty nicely this year but I agree that that will end up being a problem.
Blodget: The other thing you pointed out though is that wage growth is actually good for the economy, which it gives people more money to spend, it’s good for the consumers, maybe ultimately if we have real wage growth that can drive some more topline growth.
Golub: Yeah and it’s been somewhat curious that with — here’s what you have is that because the labour market is tight — You know, some governments report just came out saying that every single sector of the economy is complaining that they can’t find qualified workers. And we underestimate how strong the labour market is. So it’s not only that wages are going up but that people’s confidence in their ability to find work if they want it is really high. And so, you and I were talking about this before offline that there’s this thing called the quits rate, where people voluntarily leave a job because if they know they can get one around the corner, their likelihood of willing to work for a guy who they don’t really love goes down. And so, those statistics are all telling you people are feeling really great about their job prospects and that shows up in consumption and that shows up in broad economic success.
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