American employers added an unexpected 467,000 jobs in January, sending futures on the Dow Jones Industrial Average down 259 points Friday morning on the belief that the Federal Reserve will begin raising interest rates in March.
The strong Labor Department report ran contrary to economists’ outlook ranging from 150,000 job addition to a 400,000 job loss linked to the Covid-19 infection surge last month. It didn’t help that payroll processing firm ADP on Wednesday said private-sector payroll data showed employers shed 301,000 jobs from December to January. The two reports don’t always mesh, mostly because of different reporting tools. Of the two, the report from the Labor Department is the one most widely tracked.
According to the Labor Department’s report on Friday, retail trade employment rose by 61,000 in January, with general merchandise stores adding 29,000 jobs. Including other retail categories such as health and personal care, sporting goods, music stores and building material and garden supply stores, retail trade employment is “61,000 above its level in February 2020,” the Labor Department said.
Employers, including fashion firms and retailers, have also talked about the tight labor market for months and how difficult it has been to add staff to their ranks, not to mention how much more they have to pay as a hiring incentive. Some believe government benefits encouraged would-be job-seekers to wait out the worst of the pandemic surges. Then it was thought that some might begin pounding the pavement in the fall when students were expected to return to the classrooms. Retailers such as Walmart added 20,000 workers to its supply chain last September, and followed up with an additional 150,000 store associates a month later in preparation for the holiday season. Two weeks later, Amazon added 150,000 as it doubled down on holiday hiring.
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However, in November Macy’s Inc. CFO Adrian V. Mitchell described the labor shortage as “transitory.” That same month, Walmart Inc. CEO Doug McMillon said the hiring situation changed when the federal stimulus dollars went away as people returned to work in a “matter of weeks.”
But as staffing levels are bouncing back, The Conference Board (TCB) on Friday said average hourly earnings rose 5.7 percent over the past 12 months, an indication that recruitment and retention difficulties remain high. “With the unemployment rate expected to fall to near 3 percent by the end of the year, labor markets will remain tight in 2022 and likely beyond,” TCB said, adding that the labor force participation rate is still at 62.2 percent, or more than 1 percentage point below its prepandemic rate.
Higher wages, plus escalating transportation costs across freight, air and sea, are just some of the inflationary pressures felt by fashion companies. Many also see their raw materials costs rising too. Retailers are starting to rise prices to offset the larger bills their manufacturers are handing them.
A Federal Reserve interest rate increase will initially impact the rates commercial banks charge each other for overnight loans. The increase in the cost of credit is one way to cool off the too-hot economy. In time, higher rates will make borrowing more costly for businesses and consumers. Some will put off borrowing and save instead to capture higher interest rate payments. But over time, the cost to borrow will increase and borrowers will see that in their monthly payments. Some businesses may elect to forgo certain investments because of higher loan payments. For consumers, higher mortgage rates might mean less discretionary income to spend for other things, such as for apparel, accessories and footwear. Or they might elect to pad their savings accounts after months of pent-up demand that saw consumers refresh their full closets.
UBS softlines analyst Jay Sole last month said retailers this year could see pressures that will impact sales and merchandise margins. He believes that inflation will cause consumers to pull back on apparel and footwear spending, noting too that “rising interest rates will be a headwind on demand.” For retailers, that means they will need to pay close attention to inventory levels and keep tabs on the promotional environment to avoid margin contraction.