Was Accelerated Job Growth in June a Sign of Things to Come? Economists Weigh In
Source: U.S. Bureau of Labor Statistics, JLL
If Steve Hovland’s near-term outlook for U.S. job growth is correct, the second half of 2017 looks quite promising for the commercial real estate industry.
“The pace of hiring should accelerate in the second half of the year as Congress moves past healthcare reform and begins to lift regulations that stymie growth,” says the director of research at Irvine, California-based HomeUnion Inc., an online real estate management firm that helps individuals invest remotely in rental properties.
“Furthermore, companies will have a better understanding of how policy changes will evolve with the new administration, giving them more confidence to resume hiring,” continues Hovland. “We expect 1.4 million new jobs to be created over the final two quarters of 2017.”
The comments from Hovland come on the heels of the latest jobs report from the Bureau of Labor Statistics (BLS), which shows total nonfarm payroll employment increased by 222,000 in June, beating economists’ expectations. Leading up to the release of the report last Friday, the consensus among the nation’s top forecasters was that the U.S. economy had added 180,000 jobs in June.
The BLS also revised the job gains for April and May upward by 47,000. Meanwhile, the unemployment rate rose slightly from 4.3 percent in May to 4.4 percent in June.
Ryan Severino, chief economist at Chicago-based JLL, says that while he tries to avoid reading too much into one or two months of data, the “solid” job growth for June is an encouraging sign.
“The outlook remains bright given how far into an economic expansion we are (now eight years), but over time it will be challenging to maintain the pace of job gains, given the labor scarcity,” cautions Severino.
“That said, over the last two years the labor market has been generally pretty strong in the latter half of the year, averaging 224,000 jobs per month in 2015 and 193,000 jobs per month in 2016,” explains Severino. “The outlook is probably slower than that given the increasing difficulty in finding workers, but I don’t see a labor market implosion coming soon.”
According to the BLS, employment in professional and business services continued to trend up in June (net gain of 35,000 jobs) and has grown by 624,000 jobs over the last 12 months. The healthcare sector added 37,000 jobs in June and has added an average of 24,000 jobs per month during the first half of 2017 compared with a monthly average of 32,000 jobs in 2016. The leisure and hospitality segment, which includes restaurants and bars, added 36,000 jobs in June. Even the retail trade sector, which has been hit hard with job losses over the past year, added 8,100 jobs in June.
REBusinessOnline asked Hovland and Severino to weigh in on a number of timely issues, including the relatively low labor participation rate, slow wage growth and the interest rate environment. Their edited responses follow:
REBusinessOnline: Was there a particular employment sector that stood out to you in terms of job gains relative to commercial real estate?
Hovland: Professional and business services, which includes most tech workers, continues to drive the economy forward. This sector is the linchpin to the future economy, so growth in the sector is widely tracked. It creates secondary positions, such as the 8,000 childcare workers added in June and 29,000 jobs added in food services.
The other hopeful sign was an increase in mining jobs during June (plus 8,000). After oil prices collapsed, thousands of mining jobs were eliminated. We anticipate more of these jobs will be created in the future as the number of rotary rigs increases. According to Baker Hughes (an oil-field services company), rig counts doubled in the past 12 months and should remain near current levels, with oil prices hovering near $50 per barrel.
Severino: Again, I try not to read too much into any one month. But if you look over the last year, the apparel and the electronics and appliance store industries have been among the sectors with the largest percentage contraction in jobs. To a certain extent, that reflects the changing landscape for retail as the sector reinvents itself.
REBO: The change in total nonfarm payroll employment for April and May was revised upward by a combined 47,000 jobs (33,000 in April and 14,000 in May). We know that revisions are routinely made to the initial jobs report for any given month. Was there anything particularly newsworthy about the revisions in April and May?
Hovland: We see positive revisions as a welcome sign that the job market is humming along. In general, April and May revisions have not been particularly newsworthy. The Fed already moved rates higher in June despite lackluster initial figures for April and May, so that didn’t impact policy decisions. The August revision is always interesting to watch since the BLS frequently underreports prior to the September meeting of the Federal Open Market Committee (FOMC). Participants are often away on vacation during the brief survey period, and a low August headline figure has given the FOMC an excuse to delay interest rate hikes until December for the past two years.
REBO: Does the latest jobs report bolster the likelihood of another rate increase or two by the Fed this year?
Hovland: We anticipate one more hike this year, coming at the December meeting. June’s job report reaffirmed the Fed’s position that the economy is strong enough to absorb a normalization of interest rates.
Severino: I continue to believe that another hike is on the table until we see the wage growth, inflation and consumer spending data for the summer. The labor market is tight, which could translate into stronger wage gains later in the year, and the Fed’s outlook remains optimistic. We will have a better sense after the summer of where the Fed stands.
REBO: What metric or nugget(s) of information in these monthly jobs reports do you typically focus on most and why?
Hovland: Job growth is the single greatest predictor of new renter demand, so healthy national numbers provide insight into the near-term health of the single-family rental market. However, we’re constantly drilling down into the markets where we operate to look at specific job figures and announced expansions that will impact neighborhood dynamics. We also closely monitor the employment market in areas where we might expand to mitigate risk to our investors.
Severino: The headline jobs is obviously important, but these days I pay close attention to wage growth because of the implications it has for spending, inflation and ultimately interest rates, which could be terribly important for commercial real estate.
REBO: Wages grew marginally in June, rising 2.5 percent from a year ago and with little change from prior months. Some economists have expressed concern that wage growth has been slow, particularly in light of the tight labor market and low unemployment rate nationally. How do you explain the slow growth in wages and what impact does that have on our economy as a whole?
Hovland: The slow pace of wage growth has been troubling for the economy as a whole and is beginning to exert a larger impact on the real estate market. It’s important to remember that wage growth isn’t low for everyone, but a significant share of the workforce isn’t enjoying the benefits of a healthy economy. As a result, home prices and rent growth will return to more long-term trends until stronger wage growth lifts the ceiling.
Severino: Fundamentally, wages should be equivalent to labor productivity growth plus inflation. If you look at both of those measures, they have been low recently. Inflation has been less than 2 percent, while productivity growth has averaged around 0.7 percent over the last two years. If you add those two together, you get to about mid-2 percent wage growth, which feels about right. Now, certainly a tight labor market can distort this relationship, and there is still a chance that occurs later in the year, but we haven’t reached that point yet.
REBO: Why does the labor participation rate, which stood at 62.8 percent in June, continue to remain quite low by historical standards, and to what degree should we be concerned about that figure?
Hovland: A myriad of factors has combined to push down the labor force participation rate. After the recession, many Baby Boomers who were close to retirement and unable to retrain into new industries left the workforce. As more Baby Boomers retire now that nest eggs and real estate prices have recovered, the participation rate will remain low. A better proxy for labor force participation is those persons aged 25 to 54 years. In June, 81.6 percent of that cohort was working, down from a peak of 84.6 percent in 1999.
Severino: There are a few key reasons. The first is the aging of society. As society has gotten older, some workers who could technically participate in the labor market have not. Second, a number of people who are unemployed are now likely structurally unemployed, especially if they can’t return to work after eight years of economic expansion and a 4.4 percent unemployment rate. Basically, they just don’t have the skills that are in demand and aren’t retraining themselves, and/or they live in a geographical area with limited job opportunities and are not able to relocate to an area with more abundant opportunities.
Third, young prime-age working men are participating at a far lower rate than they used to. This is at least partially due to the second reason above, but also because they are spending more time playing video games. Seriously. Men 21 to 30 years old worked 12 percent fewer hours in 2015 than in 2000. Obviously, that is not a uniform 12 percent reduction by every worker. Some of them just aren’t working at all.
Regarding the level of concern, the first reason isn’t alarming. The second reason is concerning, particularly if those people would prefer to work. However, as a society and economy we don’t do a very good job of job retraining, so there isn’t much we can do about that in the short term unless policy changes.
The third reason is seriously alarming. Not only are these men potentially imperiling their careers on a permanent basis (and the future labor force), but they are also reducing their appeal as potential partners/spouses. It has been well documented that educated women increasingly outnumber educated men, so many have a hard time finding partners. Marriage and birth rates are positively correlated with education, so this has ramifications not only for the economy, but broader society as well.
— Compiled by Matt Valley and Kristin Hiller