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How does retail consolidation impact wages?

June17

Amazon vs. Wal-Mart

American consumers will soon have an easier time: they will shop at either Amazon or Wal-Mart. That’s overstating the situation, but after Amazon announced that it was buying Whole Foods for $13.7 billion and Wal-Mart (which last year bought fledging Amazon competitor Jet.com for $3.3 billion), said it had purchased online men’s retailer Bonobos for $310 million, the retail landscape shifted once again. Both transactions signify that to succeed, companies will need robust digital as well as a brick and mortar beachheads.

Whenever big deals are announced, it can make you feel like there are going to be three or four companies left in each sector. In the past, there have always been cycles of expansion and consolidation and just as big conglomerates were created, they could also be pared down. [Just ask Jeffrey Immelt, the soon-to-be former CEO of General Electric. He was pushed out of the industrial giant after shareholders had agitated for the removal of the guy whose tenure coincided with a 30 percent loss in the stock’s value and a concurrent unloading of non-core businesses that it had gobbled up.]

But the most recent spate of merger activity may be different. As Neil Irwin of the New York Times points out, “a relative few winners are taking a disproportionate share of business in a wide range of industries, including banking, airlines and telecommunications…Essentially, the corporate world is bifurcating between winners and losers, with big implications for their workers.” In other words, those employees who work for the winners may find themselves with better pay packages.

The implications of a winner-take-all corporate environment may also call into question the Federal Reserve’s belief that the strength of the labor market should augur higher wages and increased inflation. That rationale is based on an economic theory, which posits when the unemployment rate falls to a low enough point, power shifts from employers to employees, who can demand higher wages. With that extra money in their pockets, workers increase their spending, which in turn pushes up prices. (To read more about this concept, read this post by John Cassidy).

But what if the theory doesn’t work? The WSJ’s Greg Ip notes, “In Japan, unemployment is the lowest in decades and labor shortages are rampant. Yet wage growth hovers around zero in part because retirees are taking menial jobs to supplement their pensions. Germany has the tightest labor market in two decades, but pay gains are below 2 percent.”

The secret sauce to broad-based wage growth is likely productivity, which as mentioned in this previous post, remains mysteriously low. If it does not pick up, the U.S. could become a large, developed economy whose growth and wages inch along. If that’s the case, those who are fortunate enough to work for the winning companies will continue to see wage growth, while everyone else may be stuck.

MARKETS: The recent two-week sell-off of technology shares has created a sub category of commentary, which I like to call “tech bubble porn”. There have been lots of stories about “FAANG” stocks’—Facebook, Amazon, Apple, Netflix and Google parent Alphabet (make it FAN-MAG, if you want to add Microsoft) accounting for a disproportionate share of the broader market gains. While some tech companies are sporting lofty valuations, the comparisons to the 2002 dot-com crash seem overblown.

  • DJIA: 21,384, up 0.5% on week, up 8.2% YTD
  • S&P 500: 2433, up 0.01% on week, up 8.7% YTD
  • NASDAQ: 6151, down 0.9% on week, up 14.3% YTD
  • Russell 2000: 1421, down 1% on week, up 3.7% YTD
  • 10-Year Treasury yield: 2.155% (from 2.2% week ago, during the week, the yield touched lowest level of the year)
  • July Crude: $44.68, down 2.4% on week
  • August Gold: $1,255.20, down 1% on week
  • AAA Nat’l avg. for gallon of reg. gas: $2.30 (from $2.34 week ago, $2.35 year ago)

THE WEEK AHEAD:

Mon 6/19:

Tues 6/20:

Weds 6/21:

10:00 Existing Home Sales 

Thurs 6/22:

9:00 FHFA Home Price Index

4:30 Fed releases Dodd Frank Stress Test Results

Friday 6/23:

10:00 New Home Sales

  • Posted by Jill Schlesinger
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