After more than five years of an economic recovery in the U.S., signals of an increase in wages have finally begun to appear. This is extremely significant, given that the job market situation has continued to improve but wage rises have proven elusive. This is also crucial for the economy as it is expected to induce inflation to pick up, which may then prompt the Fed to raise rates.
Economic Signals
According to data from the Department of Labor, costs of employment have increased 0.7% over the last two quarters. The rise in this metric in the third quarter was propelled by a 0.8% increase in wages and salaries for civilian workers. This is the largest increase experienced since the second quarter of 2008.
Additionally, the unemployment rate has declined by 1.4 percentage points to touch 5.8% for the month of October. Meanwhile, the number of job vacancies has been the highest since 2001 for the months of August and September.
In the month of September, around two unemployed workers were applying for each opening. This is a significant decrease from nearly seven per position recorded in Jul 2009 and the lowest since early 2008. This is evident by data from report from Bloomberg which is based on a Labor Department report released on Nov 13.
According to some economists, the ratio of two applicants per position result in significant pay hikes over a period of six months. This happens because companies compete amongst themselves for a limited number of applicants.
Growth in Specific Sectors, Regions
Evidence on the ground is already available in specific industrial sectors and geographic regions. For instance North Dakota and Texas are experiencing increases because of heightened activity in the energy sector. Meanwhile, a booming house building market in the Southeast is pushing up wages.
Additionally, some companies have started increasing wages this year in order to hire or retain employees. This includes the likes of trucking companies like Swift Transportation Co. (SWFT) and Con-way Inc. (CNW).
But pay raises may soon become common across sectors. In fact, figures from Automatic Data Processing, Inc. (ADP) show that the hourly wage rate of 24 million workers increased 4.5% over the last quarter. This means that wage increases occurred across industrial sectors, irrespective of companies’ market capitalization and the nature of employees.
Our Choices
The increase in wages is likely to boost the purchasing power of customers. Low oil prices have already reduced the burden on consumers substantially. Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
The Kroger Co. (KR) is one of the nation’ s largest grocery retailers operating 2,638 supermarkets and multi-department stores in 34 states and the District of Columbia under approximately 24 local banners including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's.
In addition, Kroger directly, or through subsidiaries or franchisee and operating agreements, runs 785 convenience stores, 324 fine jewelry stores, 1,271 supermarket fuel centers, and 37 food processing plants.
Kroger holds a Zacks Rank #2 (Buy) and has expected earnings growth of 15.4%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.78.
Red Robin Gourmet Burgers Inc. (RRGB) is a full-service casual dining restaurant chain (named Red Robin Gourmet Burgers) that serves burgers made from beef, chicken, fish, pork or turkey and veggie patties. It also offers salads, sandwiches and other entrées.
The company also runs limited service non-traditional prototype restaurants, named Red Robin's Burger Works. As of Jul 13, 2014, Red Robin operated 365 company-owned and 7 Red Robin Burger Works in 35 states and 130 franchised restaurants in 19 states and 2 Canadian provinces.
Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 13%. It has a P/E (F1) of 24.81x.
Zumiez, Inc. (ZUMZ) is a mall-based specialty retailer of action sports related apparel, footwear, equipment and accessories. The company targets the youth both men and women between the ages of 12 to 24, who seek popular brands that symbolize a lifestyle representing extreme sports.
Zumiez s stores span 2,900 square feet on an average, and feature couches and video game stations to encourage customers to shop for extended periods. The company’s stores are strategically located near busy areas of a mall, such as food courts, movie theatres, music/game stores and other popular teenage hang-out destinations.
Zumiez, holds a Zacks Rank #2 (Buy) and has expected earnings growth of 11.8%. It has a P/E (F1) of 21.77x.
Some economists have questioned whether a broad based increase in wages is indeed on the anvil. But there are enough indications to the contrary. In fact, other economists opine that wage growth is indeed occurring, though at a steady pace. Given these factors, adding these stocks to your portfolio would be a prudent choice.
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