By Brandon Mulroe
Easing conditions in the labor market may provide cost relief for non-investment grade issuers.
In recent months, elevated macroeconomic uncertainty has led to increased participation in the workforce, lower “quit rates” and an easing in the pace of wage growth.
We believe these trends are likely to provide relief to issuers that have been forced to navigate a tight labor market, with high levels of turnover and rapid wage increases, in the aftermath of the COVID-19 pandemic.
The labor force participation rate among U.S. persons 55 years or older remains below the pre-pandemic peak. As of May 2023, 38.4% of this age cohort was employed or seeking work, down from 40.3% in December 2019.
However, labor participation among U.S. adults 25 to 54 years of age now slightly exceeds pre-pandemic levels at 83.4% – an uptick from 82.9% in December 2019.
While the total U.S. unemployment rate remains relatively low, we saw a 0.3 percentage-point increase to 3.7% in May, per the U.S. Bureau of Labor Statistics.
The U.S. quits rate has seen an overall downward trend over the last 12 months as well, with April 2023 voluntary employee separations declining to 2.4% compared to 3.0% in April 2022.
As the turnover rate has declined, the rate of wage inflation has also decelerated. The average hourly wage in the U.S. increased 4.3% over the 12 months through May 2023, which compares to the 5.5% increase observed in May 2022.
If the quit rate continued to stabilize, it would benefit issuers that depend on labor as a major cost component. A lower quit rate would be expected to lead to lower wage increases, and lower turnover would also lead to reduced recruiting and training costs. Sectors that potentially stand to benefit include leisure, hospitality, restaurants, entertainment and retail.
Management teams in these sectors have recently noted improvements in the labor market, citing higher applicant flow and improved retention. One of the largest quick service restaurant brand operators in the U.S. indicated that staffing levels are back to 2019 levels – after it previously had to limit restaurant operating hours due to shortages.
Meanwhile, the management team of a leading theater chain observed that while it is paying higher average wages than before the pandemic, the availability of labor has recently normalized to pre-pandemic levels. As issuers in these sectors contend with a less certain macro backdrop, improvements in the labor market – if they are sustained – would be a welcome relief.
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