Rebecca Byrne
While Main Street is keeping its fingers crossed for a solid jobs report Friday, some on Wall Street are worrying that a pickup in the labor market will hurt corporate earnings down the road.
Nokia's(NOK Quote - Cramer on NOK - Stock Picks) upbeat preannouncement Thursday served as a reminder that firing workers and keeping other costs low can reap big rewards, particularly when the economy starts to turn around. But now that the job market is showing signs of life, some say labor costs will soon begin to rise and that corporate profits could take a hit after what is expected to be a stellar fourth-quarter reporting season. On Friday, the employment report for December should show that 148,000 new jobs were created. The jobless rate is expected to hold steady at 5.9%. "Equity analysts are looking for a Goldilocks report as the best outcome -- not too hot and not too cold," said Ethan Harris, senior economist at Lehman Brothers. "You want to see decent job growth, because you don't want ugly headlines out there scaring consumers, but as an equity analyst [or investor], you're hoping companies are not completely abandoning cost controls and aggressively adding to hours worked." Some economists think a rise in employment this year will prompt a falloff in productivity, which in turn could hurt profits. Millions of job cuts have prompted a surge in per-employee output over the past year, with firms squeezing more out of fewer workers. In the third quarter, productivity surged at an annual pace of 9.4%, helping to boost profit margins. "We may not see productivity maintain its very rapid rate of increase over the past 18 months," said John Lonski, senior economist at Moody's Investors Service. "But we still have low rates of capacity utilization and relatively high levels of unemployment." Lonski said a jobless rate of 5.9% suggests there's still plenty of slack in the labor market. "You may have to get that unemployment rate down to 4% before you begin to have a problem with fast-climbing unit labor costs," he said, adding that profits aren't likely to be affected until sometime in 2005.
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