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Underwhelming Job Growth in May Raises Question on Fed’s Next Move

The three-month moving average of monthly nonfarm payrolls has fallen steadily from 201,000 in February to 121,000 in May, according to the Bureau of Labor Statistics.

Are the below-average monthly job gains recorded in May due to a labor shortage, or is there weakness emerging in the employment market?

That’s the crucial question in the wake of the latest job figures released by the Bureau of Labor Statistics (BLS), which showed employers added 138,000 nonfarm payroll jobs in May, well below the 12-month average of 181,000 positions. Meanwhile, the unemployment rate fell from 4.4 percent in April to 4.3 percent in May.

“Most evidence points toward the former, and that should keep the Fed on track to lift rates two additional times in 2017, even if it waits until September,” says Steve Hovland, director of research for Irvine, California-based HomeUnion, an online real estate management firm that specializes in helping investors acquire and manage single-family home rentals.

Steve Hovland, HomeUnion

Steve Hovland, HomeUnion

“Job openings remain near record-high levels, indicative of a skills gap rather than hesitant employers. Furthermore, the stock markets regularly flirt with record highs, job growth has been positive for the longest post-war stretch and home prices have soared,” adds Hovland.

Members of the Federal Open Market Committee (FOMC) will need to weigh whether the lowest unemployment rate in 16 years is sufficient to justify a rate hike despite relatively low monthly employment gains thus far in 2017, according to Hovland.

“Although the FOMC has become more aggressive over the past year, dovish members may have sufficient fodder to sway the vote at the important June 13-14 meeting,” posits Hovland.

Robert Bach, Newmark Grubb Frank Knight

Robert Bach, Newmark Grubb Knight Frank

In March, the Federal Reserve raised its benchmark rate for the second time in three months to a range between 0.75 percent and 1 percent. Such moves by the Fed tend to have more of a direct impact on short-term rates than long-term rates, but the commercial real estate community is watching closely.

The tepid May jobs report doesn’t mean the economy is slowing, emphasizes Robert Bach, director of research for the Americas at real estate brokerage firm Newmark Grubb Knight Frank.

“The Atlanta Fed’s GDPNow forecast is for GDP to hit a robust 3.4 percent this quarter,” says Bach. “What it means is that the labor market is tightening to the point where employers are finding it hard to source talent.”

Barbara Byrne Denham, senior economist with real estate research firm Reis, says the U.S. economy is in “a decelerated pattern of job growth — still positive but seemingly slower every quarter. This can be expected this late in the expansion. Yes, it’s been a long expansion, but the numbers suggest it still has legs precisely because it’s grown so slowly.”

The cumulative real GDP growth in this expansion is 17.3 percent as of the first quarter, according to Denham. “Although we are six quarters past the duration of the last expansion, the cumulative growth of that expansion was 18 percent — higher than this current longer one,” she points out.

Barbara Denham, Reis

Barbara Byrne Denham, Reis

Moreover, the previous expansion leading up to the Great Recession was fueled by the housing bubble, explains Denham. “The current expansion has not shown evidence of a bubble in any investment class. Thus, this is why I believe the current slow growth rate is healthy and should continue even though it’s weak and getting weaker.”

If the current economic expansion that began in June 2009 lasts a couple more years, it will be the longest since 1857, according to Bach. “That could happen because inflation is low and the Fed is raising short-term rates only gradually, with three quarter-point increases penciled in for this year and three or four next year. If that happens, rates would still be low by historic standards. Low inflation and interest rates are the consolation prize for the sluggish recovery, with GDP averaging 2.1 percent at an annualized rate.”

Inside the Numbers

Job growth in May was healthy in several employment segments, including professional and business services (+38,000), leisure and hospitality (+31,000), food services and drinking places (+30,300) and healthcare (+24,300).

Of the 24,300 jobs added in May in the healthcare sector, 12,600 were in ambulatory services. That reflects a move by healthcare providers to shift jobs to lower-cost venues, according to Bach.

The healthy rise in the number of professional and business services drives demand for office space, Bach points out. Meanwhile, restaurants and bars are benefiting from consumers who are “feeling good enough to dine out a lot,” he says.

The increase in total nonfarm payroll employment for March was revised downward from 79,000 to 50,000, and the increase for April was revised downward from 211,000 to 174,000, according to the BLS. With these revisions, employment gains in March and April combined were 66,000 less than previously reported.

Net Effect

What does the latest jobs report mean for commercial real estate? “It too has been growing at a slow rate, so we should see more of the same,” says Denham.

She points out that the rent growth rate in the apartment market has slowed to 3.2 percent on a year-over-year basis, but the quarterly growth rate in effective rents (net of concessions) was 0.2 percent. A year ago, rent growth was over 1 percent per quarter.

“While construction is expected to jump this year and vacancy will climb a bit, net absorption should stay positive given the positive job growth,” predicts Denham. “We had thought that more [renters] would move into the housing market at this point, but low inventory is keeping many from buying.”

If the Fed kicks the can down the road to September with regard to interest rate hikes, the real estate sector could be well served, observes Hovland. “The spring and summer buying season already produces a seasonal uptick in home prices, so the last thing the market needs is an interest rate hike corresponding with the beginning of summer. Investors are also most active this time of year, and pay higher interest rates than buyers that intend on living in the purchased home.”

— Matt Valley 

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