Walmart and Home Depot announced positive earnings. The Retail Sales report comes in better-than-expected. The labor participation rate has yet to recover from the pandemic and companies may need to look for alternatives.
Walmart and Home Depot Announce Earnings
U.S. Retail Sales Come in Hotter Than Expected
Labor Shortages Continue Cause Companies Complications
(Tuesday Market Open) Retailers take their turn in the earnings spotlight with a few big retailers taking center stage. Additionally, a hotter than expected U.S. Retail Sales report was released by the U.S. Census Bureau. Despite the increase in sales figures, a big problem that retailers are seeing is worker shortages because many workers have yet to return from the pandemic layoffs. Let’s breakdown all this retailer news starting with earnings.
Walmart (WMT) announced earnings before the open. It beat on earnings and revenue estimates. The company reported a 6% increase in comparative sales excluding fuel led by its Sam’s Club division that increased 13.9%. Its eCommerce division rose 8% bring its two-year online sales growth to a staggering 87%. Walmart also increased its fiscal year earnings outlook.
Pandemic home improvement projects have not stopped if Home Depot’s (HD) earnings are any indication. Home Depot’s third quarter earnings rose 9.8% on a 6.1% increase in comparative sales a year ago.
Walmart and Home Deport are both Dow Jones Industrial Average ($DJI) components and the news has the index futures pointing higher before the open.
In other earnings news, EV maker Lucid (LCID) is up more than 5% before the open. The company missed on earnings and revenue estimates but showed investors that it had a large cash position and increasing orders. Additionally, EV makers look to be big beneficiaries of President Biden’s climate change infrastructure plans.
Also, in the EV space, CEO Elon Musk continues to take profits on his company, Tesla (TSLA). According to Bloomberg, Musk has now sold a $7.8 billion worth of stock.
The U.S. retail sales report showed an increase of 1.7% which is higher than the expected 1.5%. When removing vehicle sales, the core retail sales increased 1.7%—well ahead of the 1.0% forecasted. However, the numbers are not adjusted for inflation so the better-than-expected report could be a little skewed by the rising costs of goods and service.
Finally, the White House is also expected to announce their nomination for a Fed chairperson today. According to Barron’s, the top two contenders are existing Fed Chair Jerome Powell and Fed Governor Lael Brainard.
Aside from inflation, probably the biggest focus in the economy now is the employment situation. Obviously, the pandemic took a big toll on businesses around the country and consequently with employment levels. However, by many measures, the employment situation is getting better in the United States. Last week’s first-time unemployment claims came in at 267k. While this number is not quite at the pre-pandemic low levels we saw, it represents a big stride toward normalcy. The nation’s unemployment rate is now sitting at 4.6%, down from the pandemic high of 14.7%, again, showing a return to levels we have hoped to see.
On one hand, the improving employment numbers make the Fed’s job easier in that it opens the way to a more hawkish monetary stance to combat inflationary pressures. Put another way, if the economy was saddled with very high unemployment, it would be difficult for the Fed to reduce its bond-purchasing program or raise the fed funds rate for fear of suppressing economic growth and employment. On the other hand, the improving employment numbers are only giving a partial view of what is happening in the labor markets.
Labor Conundrum: Despite the improving employment numbers mentioned above, there are a lot of companies still struggling to fill job openings. You may have seen this at restaurants, which have limited their capacity due to staff shortages, or even in delayed shipping deliveries because of driver shortages. This is partially the result of many people voluntarily leaving the workplace. You can see this in the increasing “quits rate” of last Friday’s JOLTS report as well as in the Labor Force Participation Rate (see Chart of the Day). The latter measure is an estimate of the country’s active workforce, and lower numbers indicate fewer voluntary participants in the labor force. Labor force participation has been generally declining for 20 years, and while it has recovered a little from its pandemic lows, the upsurge appears to be stagnating.
Permanent Changes?: What is the cause of this voluntary reduction in the workforce? Anecdotally, many of us have heard of employees becoming more discriminating in finding the job that better fits their needs, whether that means telecommuting, childcare restraints, health concerns, or finding a meaningful job. Whatever the cause of the workforce reduction, it is a significant enough phenomenon that it has generated a name: “The Great Resignation.”
But the bigger question is, are these changes permanent, or are they some temporary pandemic-induced change that will reverse itself as the pandemic response eventually comes to an end?
According to Goldman Sachs Global Investment Research, of the approximately 5 million persons who left the labor force since the start of the pandemic, most (3.4 million) are over 55 years old. In other words, most of these people are likely not to return to the workforce. Of those that are under 55 years old, most view their exits as temporary. So, the bottom line is that we are seeing real changes in the workforce that aren’t likely going to reverse themselves. This conundrum—that fewer people are out of work involuntarily, yet there is still a labor shortage—poses challenges for the economy. Consequently, given that most of the lost workers aren’t coming back, the economy will need to adapt. I don’t know exactly what form all those adaptations will take, but we have already seen some, including more telecommuting, job flexibility, and rising wages. The labor force appears to have gained some leverage since the pandemic’s beginning.
Company Changes: So how are companies responding to these issues? Retailers like Nike (NKE) are becoming less reliant on labor in their brick and mortar stores by pushing a significant amount of its retail sales online. Much of IBM’s (IBM) operations are run in the Far East, thus reducing its reliance on U.S. labor.
Another approach is to increase automation. This may be one reason why the Information Technology sector has been the top-performing sector over the past six months. Companies like Nvidia (NVDA) and Salesforce (CRM) have grown greatly over the past six months, up 111% and 42% respectively. Also consider industrial companies that help others with automation. Rockwell Automation (ROK) is a company that helps companies automate, and the market has rewarded it, gaining 26% over the past six months. Of course, there’s no guarantee that the performance of any of these example stocks mentioned here will continue into the future, but keep your eyes open, because even though the economy has challenges, there may still be a variety of potential opportunities out there for investors.
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