Tuesday, April 18, 2006

“Employees Have the Upper Hand Again.”

“Employees have the upper hand again,” writes a friend who runs a medium-sized, fast-growing company in Cleveland, commenting on our “No Inflation Here…” report last week.

Specifically, he tells me:

From 2001 to late 2005 if I was looking to hire an engineer or sales person, I could always get them to come for $5,000 to $10,000 less than a comparable shop, with the promise of a quick review and bump if they produce.

But that was then, and this is now:

I’ve lost 2 people that had accepted offers from me but after giving notice to their current employer got offers at $10,000 more, and took them.

As for the Greenspan Adjusted-To-Exclude-Rising-Prices Consumer Price Index, he writes:

Forget what’s happened to my rent, my health insurance, my utility bills, which is 20% of my costs—the pressure on salaries is the big deal I’m seeing.

Only yesterday the Treasury market rallied on a lower-than-expected number from the—I am not making this up—National Association of Home Builders/Wells Fargo Index of Builder Confidence. (How is this builder-gloom possible, when all the public home builders express such great confidence in the housing market?)

Seems like investors are looking for any sign of weakness in whatever index-of-the-day might suggest some incremental weakening of the job-creation machine that is the U.S. economy in order to declare a top in yields and an end to the Fed’s endless tightening.

But if a businessman in Cleveland—not San Jose or Phoenix or Fort Myers or Arlington or Manhattan, but Cleveland—is losing new hires to bidding wars, it may take more than a weak number from the 48th Federal Reserve District Prices Paid for Intermediate Raw Materials Third Derivative Seasonally Adjusted Smoothed and Revised Index to slow things down.

Like a few more rate hikes than the bond bulls expect.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Captain Obvious said...

I primarily follow the energy industry where supply of everything, from essentially unskilled labor to every kind of widget imaginable, is very tight. Most of the companies I follow absorbed a 10-15% increase in personnel costs last year and expect the same this year, and next year as well.

While the energy industry is not a particularly large employer nationally, it is a meaningful employer along the Gulf Coast, in the Rockies and in what we in the oil patch call the Mid-Continent. I wouldn't be surprised if the growing demand from the industry for some specific types of labor like engineers and skilled machinists was being felt nationally.

Then there is the pressure on raw material costs, insurance costs, and (yes!) energy costs, which are well documented.

Inflation is really here, in spades, no matter what the official statistics say.

MyDailySlice said...

We are a small mfg company in GA that makes tarps for dump trucks (talk about being under the radar!). We'll easily have our best year ever (maybe 8%), which compares to the last three years at 3+%. The economy is en fuego across the board, and I honestly believe that high gas prices have been a good thing to temper the hot economy. I think if gas prices DON'T go to $3/gal, we will endure a longer cycle of rate increases. Commodity increases (including salaries) hurt now, but I think longer term will be credited with a soft landing when the economy eventually sputters.

Bush Rules said...

Um, I'm not a financial expert by any means, but how does one anectodal case indicate a contrary trend?

If you had heard the opposite scenario, would you have reached the same conclusion?


jucojames said...

I think this issue is critical and points out how "barbell" our economy has become. Bidding wars are errupting for SKILLED labor - such as engineers. However, unskilled labor is still not seeing much in the way of real increases in income. Because housing, energy and healthcare take up a far greater % of the unskilled workers' budget, their personal inflation rate is higher anyway. The housing issue is all about credit access for lower skilled workers to make up for wage stagnation. Recent numbers show that the housing ATM is closing for business.

The real question is what will dominate the headline figures - skilled worker wage pressure or increased delinquencies/bankruptcies on the low end?

Ritholtz said...

That seems to be the exception -- most employees have little negotiating power. And mpost wages have been fairly stagnant.

Am I wrong in assuming these are very specific high skills jobs that cannot be easily outsourced?

Aaron Koral said...

jucojames brings up some excellent points about wage pressures and benefit costs for lower-skilled labor. To add to jucojames' post, I ask: if labor markets are tight, causing a spike in wages and salaries for skilled labor would the cost of benefits decline for skilled workers due to a higher level of productivity from fewer employees (i.e., technology and job outsourcing in the arena of skilled labor)? Just wondering...

drsqueeze said...

I don't presume that I can forecast the weather over the next twelve months for Topeka Kansas. I don't see why you think you can figure out the inflation rate.

Greg Buchholz said...

To Barry Ritholtz's comment, if the majority of U.S. job creation is from small to medium size businesses, I believe the wage (and benefits) cost pressure cuts across skilled and unskilled labor. You may feel that you have no power as ad admin in a Fortune 1000 company that is shipping jobs offshore. But I would be that any company less than 100 employees in size is paying up meaningfully. For example, we used to start telesales people out of college at $25k base plus commission. We've moved to $30k and in some cases $35k, or we get no one. Forget the technical people like software coders, network managers, and other IT. And that goes for HR, customer service, etc. The bottom line is that for anyone with a college degree the job market is very good vs. 2001 and 2002.

quints said...

I'm with Barry. I don't see much pricing power in my industry. But it is relatively low skill - IT / Software. Anyone with an MBA can do this work. And anyone with a few thousand dollars in India can get an MBA from a competent program. And, there are a lot of people in India doing just that.

Johnny said...

Speaking from an engineer's point of view, I will definately say that the head hunters are calling more frequently. The companies are increasing the bonuses for referals. Companies are increasing bonuses. The company I work for is highering skilled labor as quick as possible from big competitors. The employee is definately in the driver seat, which we haven't been for 4 years or so, nice to get behind the wheel every once in a while.

Mark Sellers said...

All the publicly-traded employment firms (Robert Half, Manpower, Korn-Ferry) are trading at or near multi-year highs. What else do you need to know about the job market? It's very strong.

BelowTheCrowd said...

While I think it's an exaggeration to say that employees have the upper hand, my observation is that the market is better than it's been in several years. We certainly haven't gone back to '99 in terms of employment and growth, but compared to the past few years things are looking up.

A better way to look at it is that things have stabilized after a few years of downtrend. To those who are newer to the employement market -- either as employees or employers -- this may seem pretty good, perhaps the strongest they've ever seen. Those of us who have been working, hiring and firing for a couple of decades mostly see this as average. Not bad, but hardly the best we've ever seen.

Sam S. Park said...

I don't know... I think that this whole transition period (global effect - from China, India, etc.) is making all of us scratch our heads here in the U.S. Balances are out of whack, inflation numbers don't make sense, yield curves send mixed signals, and the economy keeps going despite these oil price levels... I would say just looking at headline figures and net numbers without looking into the details would seem contradictory, as the figures and logic would otherwise suggest.

If anything, much of the answers could probably be found when keeping in mind the whole globalization effect. We are truly connected globally... and literally through the Internet. You know companies have already outsourced their telemarketing/customer support overseas. This is no mystery, especially when you speak with customer support… if you actually get a hold of a live person (I’m politically allowed to say this since I’m non-white, but without an accent… no offense to my fellow minority citizens).

Come on… it’s so obvious Washington is going through this protectionism because it is worried what the future holds, as far as what else will go overseas or what cheap labor will keep coming into the U.S. You know tech is next to go… other “skilled” services is not far behind… U.S. doesn’t want to become the land of backwardation. But this next transition probably won’t come for years to come. Who knows, maybe it’s going on now. Did any of you catch the CNBC report of how some have been buying “beachfront” properties abroad? What other assets will follow, as the retirees go off to their cheaper beachfront homes abroad? And who will service their assets?

These are all of these “if, but, and, or” scenarios. We know that Congress will not sit around, and we can anticipate actions… some of which have already been in-progress. I don’t know how you view its actions, but I know they aren’t very inflation-friendly. I guess only time will tell. Until then, I look forward to your comments on upcoming musical talents. I still don’t see what’s so big about the Artic Monkeys… However, I did like your insight into Dave Matthews. I see more potential in guys like him and John Mayer, but that’s just my opinion.

BelowTheCrowd said...

Seeing the employment agencies doing well is actually not a great sign for long-term employment.

Typically these companies tend to do well when employers want temp help: they know they need more people, but don't have enough confidence to commit to full-time, long-term employees. Usually these do well early in a recovery, then back off significantly as the economy moves forward and the temps are replaced with (or become) full time.

While employment is good right now, most companies I've talked to are still quite cautious. I get lots of offers for 3-6 month contracts, but very few for long-term positions.

To some degree this also reflects increasing costs of benefits for full-time employees, a factor that has always existed but which has become more pronounced recently. However, it is my perception that that's only part of the story.

Also quite obvious to me that the effect is very regional.