July Jobs Report Is Good News for Office Sector in Particular, Say Economists
Total nonfarm payroll employment rose by 209,000 in July, according to the Bureau of Labor Statistics (BLS), beating expectations and boosting confidence that this expansionary phase of the economy still has legs. A panel of economists assembled by the Wall Street Journal predicted a net gain of 180,000 jobs.
Job growth is always a welcome sign for the commercial real estate industry — especially when the numbers exceed expectations — because employment drives demand for all types of space.
To dissect the latest job figures and identify some of the underlying trends, REBusinessOnline reached out to three real estate economists for their insights: Steve Hovland, director of research at Irvine, California-based HomeUnion Inc.; Ken McCarthy, principal economist and applied research lead for the U.S. based in Cushman & Wakefield’s New York office; and Ryan Severino, chief economist at JLL who works out of the New York City office. What follows are their edited responses.
REBusinessOnline: From a commercial real estate standpoint, what did you find most encouraging about the July job numbers and why?
Ryan Severino: We are in the ninth year of economic expansion, and business and professional services continues to represent about one-quarter of the job gains, both in July’s data and over the last 12 months. Given that many of those jobs utilize office space and are among the best-paying jobs in the economy, that bodes well for most major property types — the office sector most directly.
Steve Hovland: In general, the robust pace of job growth is encouraging for the housing sector. As new jobs are created, new households will form. A significant portion of these new positions will rent apartment and single-family homes. Additionally, the influx of professional and business services and educational and health services will support demand in the office and medical office sectors.
Ken McCarthy: Demand for commercial real estate is driven by economic growth. Whether it is office, industrial, retail, hotel or multifamily space, all require rising employment and income to increase demand. So, the stronger-than-expected increase in payroll employment points to stronger demand for all types of space.
In particular, employment in office-using industries — the sum of financial services, professional and business services as well as information — increased by 59,000 jobs in July, the largest increase since January, pointing to continued solid growth in demand for office space.
REBO: Over the last three months, employment gains have averaged 195,000 jobs per month. Can you put that figure into context for us from a historical standpoint? Is that a particularly healthy figure, or a modest number?
McCarthy: Since employment in the U.S. reached a bottom in February 2010, the economy has added, on average, 189,700 jobs per month for the 89 months of job growth. So, while it is slightly higher, the pattern of job growth over the last three months has sustained that trend.
The U.S. labor force has grown, on average, by 76,000 people per month, so the strong job growth has absorbed much of the unemployed population and helped to push the unemployment rate down steadily during the expansion. (The national unemployment rate in July was 4.3 percent.) If job growth remains at current levels, the labor market will likely continue to tighten leading to faster wage growth down the road.
Hovland: It has been 82 months since the U.S. lost jobs, and many of those jobs were layoffs from the 2010 census that weren’t factored into the seasonal adjustment. Over those 82 months, average job growth has registered 198,000 positions monthly, so the past three months are on par with the average of this recovery. More significantly, the average of 195,000 average jobs added during the last three months is sufficient to draw down the unemployment rate.
REBO: The retail sector posted a net gain of only 900 jobs in July. One month does not make a trend, but we’ve seen a few months this year where job growth in the retail sector has been weak. What are the driving factors in the retail sector leading to the soft job growth? Is e-commerce the big culprit, or are other issues at play?
McCarthy: I would say most of the weakness in retail employment is related to e-commerce. If we look at employment in e-commerce-vulnerable sectors, including apparel, electronics, department stores and others, employment in these kinds of stores has fallen by 88,900 jobs since December, meaning that employment in other retail stores is increasing.
Severino: Retail is a sector in flux. Not only is e-commerce having a big impact, but also consumer tastes have changed profoundly. We have become a more experience- and services-oriented society. People spend more on things like dining out, recreation, travel, cell phone services, Internet access, healthcare and education. Many of those expenses have experienced inflation rates much greater than growth in the CPI (consumer price index) and PCE (personal consumption expenditures) index. Meanwhile, income inequality has increased, leaving many households behind. That is not a recipe for widespread retail success.
Hovland: It’s no secret that e-commerce is making a huge dent into brick-and-mortar stores, and will continue to do so for a long time to come. The way Americans engage with retailers is in transition, but the net number of jobs will not end up negative. Amazon plans on hiring 100,000 workers by next year, easily outpacing the number of retail job losses.
On the manufacturing side, a decrease in the cost of overhead for retailers could eventually make locally manufactured goods more viable and create American jobs in factories. However, this would require a shift in consumer psyche towards quality over quantity.
REBO: The leisure and hospitality sector recorded a gain of 62,000 jobs in July. That’s a robust increase. Does that mean tourism is alive and well? What does that number say about discretionary spending?
Severino: Business travel and to a lesser extent leisure travel have recovered well. I worry going forward because consumer spending is growing far faster than discretionary income, which means households have to dip into savings and/or use debt to fund their spending. The savings rate is basically back to levels last seen before the recession. That runs counter to the belief that the recession had scarred generations of consumers into austerity. Nonetheless, households won’t be able to finance the spending out of savings and debt forever.
Hovland: We’ve seen record-setting tourism figures in America’s most visited cities over the past few years, and a gain in leisure and hospitality jobs reinforces that trend. Despite a strong dollar, which generally discourages international tourism, most of America’s hot spots are thriving. The bottom line indicates that our economy has transitioned from economic recovery to economic prosperity.
McCarthy: I would point to three implications from the growth in leisure and hospitality. First, tourism is indeed alive and well and supported not only by foreign visitors, but also by Americans vacationing across the nation. This reflects the continuing growth in personal income that job growth supports.
Second, it reflects an important shift in consumer spending priorities. The growth in employment in the food services and drinking places category has been particularly strong, while employment in retail stores has been very weak this year.
Finally, since December employment in retail has declined by 44,600 jobs, while employment in restaurants and bars is up 210,000 jobs. With many retail categories under pressure from e-commerce, stores are closing and jobs are being cut. But you can’t order dinner on Amazon, so consumers are still going out to eat. This has boosted employment in leisure and hospitality at the expense of retail.
Of course, this also has implications for retail real estate. It means that one of the biggest sources of demand for retail space is from restaurants.
REBO: The education and health services sector showed a net gain of 54,000 jobs in July, and we’ve seen that sector grow consistently over time. Healthcare is vital for all Americans, and that’s always been the case. But why is employment growth in that sector so healthy now? What factors are at play?
Hovland: Currently, 10,000 Baby Boomers retire every day, and government-sponsored healthcare for retirees has this sector booming. Additionally, the Affordable Care Act (ACA) brought coverage to millions of additional Americans, generating billions of subsidized dollars to treat them. Healthcare providers have reacted to increased demand by hiring workers. Nonetheless, many major health insurance providers are pulling out of providing coverage under the ACA, so growth in this sector can be largely attributed to a booming economy.
Severino: People consume more healthcare than they did in the past. This is partially because society is aging, and all things equal, people tend to spend more on healthcare as they age. This will only increase as the Baby Boomers continue to pass 70 years of age in greater numbers.
However, in many ways we have become a less healthy society over time. The absolute number and percentage of people who are overweight or obese remain at elevated levels, and they are generally less healthy and consume more healthcare.
And the way many people pay for healthcare (with copays) not only obscures the true cost, but also encourages overconsumption and overspending. Because consumers don’t ultimately pay the full price, they don’t comparison shop the way they do for many goods and services.
REBO: The professional and business services sector added 49,000 jobs in July, and we’ve seen that sector be healthy for several months this year. Does the office sector benefit most from growth in this employment category?
Hovland: All categories benefit from growth in this sector since it’s the baseline of the nation’s economy. These workers tend to spend money that creates ancillary positions, such as leisure and hospitality jobs. The office sector does benefit, but not to the degree it once did. More employees are working from home and remotely, dampening the need for office space.
McCarthy: Yes, professional and business services is the largest of the three main sectors that we aggregate into office-using employment. It includes such major office-using industries as accounting, advertising, legal services and consulting, among many others. So strong growth in this sector is an important driver of office demand.
REBO: Beyond the jobs numbers, did anything else jump out at you in the BLS report for July relative to the unemployment rate, wage growth, average hours worked, etc., that might of interest to our commercial real estate readers?
McCarthy: For commercial real estate, one area that is seeing strong growth is transportation and warehousing, which is being driven by rising demand for warehouse and distribution space. In July, employment in this sector was 26,400 jobs higher than at the end of last year. It should come as no surprise that the industrial real estate category has been among the strongest throughout the current expansion.
Hovland: The losses in the mining and logging sector, which includes oil workers, have abated and that segment of the job market is growing again. Oil prices are anticipated to range between $45 and $60 per barrel, keeping shale oil in the mix as a global commodity. As a result, Americans will buy light trucks and SUVs, which are the most profitable vehicles for auto manufacturers.
Severino: I don’t think many people realize that the labor participation rate has bottomed out and is inconsistently trending upward. Fifty basis points up from the trough isn’t a huge increase, but it is noteworthy. (The labor participation rate was 62.9 percent in July, according to the BLS.) The popular perception is that this figure is still declining, but that’s not true. The tightness in the labor market is pulling some of the unemployed back into the market, which is a healthy sign.
— Matt Valley