Could Bigger Pay Raises (Yay!) Send Stocks Sliding (Booo!)?

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Throughout the economic recovery of the past five years, one area that hasn't seen as much improvement as expected has been worker pay. Yet even though one survey of major employers forecasts pay raises next year will continue growing more slowly than a decade ago, some finally believe that the long lull in labor cost increases could finally come to an end. If that happens, it could take away one of the key underpinnings of the bull market in stocks that has been running since 2009.

The 2014/2015 U.S. Compensation Planning Survey from the human resources consultants at Mercer found that most employers expect to keep their pay raises for 2015 in line with the recent past. After gains of just over 2 percent in 2009 and 2010 that corresponded to periods of extremely high unemployment, wages have increased at a higher rate. Nevertheless, employers have managed to keep increased labor costs within a tight range of 2.7 percent to 2.9 percent over the past four years, and Mercer expects that 2015 raises will come in at around 3 percent once again.

But not every worker can expect to see raises that size. Mercer found that the energy industry -- which has seen some of the largest growth in the domestic economy recently thanks to the boom in unconventional oil and gas exploration and production -- should see base pay rise 3.5 percent on average next year. By contrast, several other industries, including service providers outside the financial sector, will see subpar earnings growth.

Moreover, merit will determine a substantial portion of overall pay raises. Top-rated workers can expect to get raises of nearly 5 percent, while those among the lowest-rated in any particular company will be lucky to see pay levels stay flat, according to Mercer.

Getting Back to Normal?

Even with the slight upward trend in raises, growth in salaries still hasn't matched levels from 10 to 15 years ago when jobs were more plentiful and workers were in demand. As unemployment rates have fallen, though, companies have started getting the message that they'll have to pay their best workers more in order to retain their top talent.

If that happens, then it would be good news for struggling workers, who've had to endure tough financial conditions for a long time. Median household income fell for four straight years following the 2008 recession, and even after a modest recovery, it remains below levels from the early 2000s . With inflation running at 2 percent, a 3-percent pay hike won't fully close the gap, but it will keep median incomes moving in the right direction.

What's good news for workers could be bad news for investors, though.

A Catalyst for the Next Correction?

Historically, profit margins for U.S. corporations have run at around 6 percent, according to data from the U.S. Department of Commerce. Over the past several years, though, profit margins have climbed well above that level, ranging from roughly 8 percent to 10 percent.

Although a number of factors have kept profit margins high, low labor costs and higher worker productivity have played key roles in helping companies cut costs.

Many analysts have feared, though, that the trend toward lower labor costs was bound to reverse itself in time. Much of the focus of that fear has been on signs of inflation for raw materials used in manufacturing, but if labor costs climb back toward more typical historical levels, then they could put further pressure on corporate profits.

High profit margins have contributed greatly to rising earnings, which in turn have helped keep the stock market climbing. As the bull market ages, though, a pause in earnings growth could be the catalyst for a long-awaited correction in stocks. If pay raises do start to accelerate this year and in future years, then resulting higher labor costs could turn out to be the cause of the next stock-market downturn.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger. Some dividend-paying stocks that might well survive the next stock market downturn are in our latest free report.

6 Financial Issues to Tackle in the Fall
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Could Bigger Pay Raises (Yay!) Send Stocks Sliding (Booo!)?
For many employers, open enrollment season for some benefits happens in October. This usually sneaks up on some people, who scramble to decipher benefits and make elections last minute. Although you won't be able to see the options until the enrollment period opens, take time now to review your benefits. Are you taking advantage of any 401(k) matches? Are your fully funding your Flexible Spending Account? What about employer offered life and disability insurance? (A fun infographic from the Council for Disability Awareness shows your risks). Maximize your benefits and don't leave any money on the table.
Back-to-school time can be expensive if you're not prepared. Money is spent on clothes, books, supplies and technology -- and that's before the doors to the classroom have even opened. Before hitting the stores, do these two things:
  • Conduct an online search for "coupon code" along with the name of any store you'll be shopping at. Typically you can find some great online deals.
  • Get a list from you class or teacher of specific type of notebook, calculator, etc. required. If you can't get child's "must haves" from ahead of time, buy just the bare minimums until school starts and the list is available.
It's hard to think about the holidays when we're just making it through summer, but now is the time to build up a financial cushion. Set yourself up with an automatic transfer to a separate savings account and participate in the Holiday Fund Money Challenge to build up a savings of $450. How much do you need for the gifts, travel, parties, entertaining, food and other holiday activities you anticipate? Planning will help to ease the stress that comes around the holidays.
In lieu of scrambling at the end of the year to make contributions to retirement accounts by Dec. 31, double-check your contributions now and determine if there's room in your cash flow to allow for an increase to possibly max out by year end.
Summer is a typically a time of transitions. There are weddings, moves to new homes, possibly a new family addition and more. If summer is the time when these events take place, fall should be the time to take stock of how they're panning out. If you're recently married and haven't already, now is the time to have the money talk with your spouse and make decisions about spending plans, merging (or not merging) accounts, beneficiary updates and more. If you've moved, check out how the new location has affected your cost of living spending in terms of activities, gas costs, groceries and more. Ultimately with any transition, you need to review your spending plan and determine what areas (if any) need to be adjusted.
If you're lucky enough to live in one of the states that actually experiences seasons, fall is the time to prep for energy savings by caulking and weatherstripping doors and windows, turning your thermostat back for a fixed period each day and insulating your attic, basement or outside walls.
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