By Caroline Valetkevitch

NEW YORK, (Reuters) – Labor shortages are the biggest cost risk that U.S. businesses faced in their latest quarter. As the earnings season approaches its peak, there are indications the problem will continue, according to some strategists.

As third quarter results are in, investors pay close attention to the challenge of finding and paying workers. There is also high commodity and supply price volatility.

Companies in many industries have already issued warnings, including the healthcare industry. HCA Healthcare (NYSE 🙂 Inc warned that higher labor costs in the third quarter may persist due to a shortage.

Domino’s Pizza (NYSE 🙂 reported a lack of drivers when it recently reported a rare drop in U.S. sales. FedEx Corp (NYSE 🙂 also mentioned higher labor costs as it reduced its full-year outlook in September.

Investors should be more informed about the future labor shortages by looking at results coming from the vast majority of businesses in the weeks ahead.

“We’re going to see it come up in the next couple of quarters as we try to continue to reopen,” said Mace McCain, chief investment officer at Frost Investment Advisors. The Delta variant delayed the reopening, which meant that we are still not seeing the full effects of the labor shortage.

Goldman Sachs (NYSE 🙂 strategists stated in a research paper that they have seen some “tentative indicators of improvement from supply chains data and commodity price prices” while labor market tightness may be a concern for “many companies for years.”

They wrote that although COVID-related pressures on the labor market supply are expected to ease over the coming months, they forecast a U.S. unemployment of 3.5% at the end 2022. This means companies will still face the same labor market problems they have today.

The Goldman strategists noted that stocks in the hospitality and leisure industry have been outperforming high-labor cost peers for several months. They also pointed out that the market’s “most asset- and labor efficient firms” have performed better than peers over the past few weeks and years.

Recent economic data highlights the trend of tightening labor markets. Recent data shows that the number of Americans filing for unemployment benefits claims fell to a 19-month low in week ended October 16. It was the second straight week with claims below 300,000. This indicates employers are holding onto workers to address an acute labor shortage.

Although U.S. businesses managed to maintain record profit margins in the second quarter of 2018, investors are concerned by rising costs.

So far this reporting period, stronger-than-expected earnings have raised the year-over-year profit growth forecast for S&P 500 companies to 34.8%, up from about 30% at the start of the month, according to IBES data from Refinitiv.

A labor shortage can be good news for those looking for work. Thomas Lee, Fundstrat Global Advisors’ managing partner, said that there were several indicators suggesting the temporary labor shortage.

“Labor use is in fact 4.9 million less now than before-COVID-19,” wrote he. Is it true that the COVID-19 economic changes have resulted in fewer workers and a tighter labor force? It’s not true.

Paul Nolte from Kingsview Investment Management said in Chicago that the problem of labor shortages seems to be greater for certain industries than other.

Customers-facing businesses that had to shut down during the pandemic lockdowns were having difficulty filling their positions and getting back on track, he stated. “Manufacturers are never fully closed.”