Beating expectations, the U.S. economy added 263,000 jobs in April, according to the Bureau of Labor Statistics (BLS), marking 103 consecutive months of employment gains. Meanwhile, the unemployment rate ticked down two-tenths of a percentage point to 3.6 percent, the lowest level since 1969.
Some observers are calling the latest BLS report “an April surprise” since the consensus forecast among economists surveyed by The Wall Street Journal called for total nonfarm payroll employment to increase by 190,000. The latest employment data comes on the heels of positive news that the U.S. GDP grew at a 3.2 percent annualized rate in the first quarter of 2019.
REBusinessOnlinereached out to three economic experts to get their takes on the latest data and its impact on commercial real estate. The three participants in the online Q&A included Andrew Nelson, U.S. chief economist for Colliers International; Ryan Severino, chief economist for JLL; and Tim Wang, managing director and head of investment research for Clarion Partners LLC. The following are their edited responses:
REBusinessOnline: Can you explain why the economy is performing better than expected so far this year and the effect that that’s having on commercial real estate?
Andrew Nelson: The economy has outperformed expectations to start the year as both GDP growth and job gains have surprised to the upside. Nonetheless, the trends were not quite as positive as the headlines suggest, and do not alter my basic outlook that the economy will see slower growth this year. So, any benefits to the property sector will be short-lived.
To be sure, nonfarm payrolls had its strongest gains since December, but monthly job figures are notoriously volatile (and are often revised significantly in future months), so we should not read too much into a single month of data. The average job gains over the past three months were only 170,000 per month, more than one-quarter below the average monthly gains in 2018.
Andrew Nelson, U.S. chief economist for Colliers International
Moreover, the number of job openings continues to exceed the number of unemployed workers, creating labor shortages and driving up wages. All of these factors suggest a hiring slowdown is in the works, notwithstanding inevitable peaks and valleys along the way.
Ryan Severino: It is a matter of degree. Job growth has slowed a bit from last year. In 2018, in addition to a slight boost from fiscal stimulus, employers started relaxing rules (such as hiring people who could not pass a drug test) in order to hire and fill vacancies. But it remains incredibly difficult to fill many vacancies. Thankfully, new entrants to the labor force effectively continue to get new jobs.
For the overall economy, I anticipated that growth in 2019 would start the year around 3 percent year-over-year and slow toward 2 percent on an annual basis. The first-quarter data produced a year-over-year growth rate of 3.2 percent, so that feels about right to me. Fiscal stimulus has not yet fully faded from the picture, but should gradually do so as the year unfolds.
REBO: Employment in the retail trade sector dipped by 12,000 in April, including the loss of 9,000 jobs in general merchandise stores. On a positive note, consumer spending jumped 0.9 percent in March after a 0.1 percent gain in February. This was the largest monthly gain in almost 10 years. If consumer spending remains strong, will we see employment in the retail sector start to grow again or are other factors at play that are weighing on this segment of the economy?
Tim Wang: Reacting to changing shopper preferences, most retailers are optimizing their store profitability and shifting to an omnichannel strategy, including expanding sales through online and mobile devices and shuttering less profitable stores in less desirable locations.
Year-to-date through April, the announced number of U.S. store closings reached 6,150, exceeding the total number of store closings in 2018. Therefore, the recent layoffs in the retail industry are not unexpected despite strong overall consumer spending. We believe that the retail industry must go through this period of necessary adjustments before growing again, which will likely take another two to three years to accomplish.
Severino: It is going to be difficult for consumer spending to maintain such a strong pace because wage growth is not keeping up with spending growth, and consumer debt is already at record-high nominal levels across a number of categories. I suspect that spending will pull back a bit, rendering the question about retail job gains somewhat moot. Structurally, the retail industry still faces many challenges.
REBO: The financial activities sector added 12,000 jobs in April. Over the past 12 months, this segment of the economy has added 110,000 jobs, with real estate and rental leasing accounting for almost three-fourths of that job growth. Do you expect the employment gains in this sector to continue for the foreseeable future?
Wang: Nine years into the cycle, fundamentals of U.S. commercial real estate remain attractive with healthy demand and manageable new supply. In 2018, approximately 1.4 million new households were formed and 2.7 million new jobs were added to the economy. At the same time, financing is still cheap and readily available and annual transaction volume is at the second-highest level since 2007.
Tim Wang, managing director and head of investment research for Clarion Partners LLC
More importantly, both institutional and high-net-worth individual investors continue to allocate more capital to commercial real estate for high current income and portfolio diversification. For these reasons, we believe that the real estate industry will continue to expand along with the steady growth of the U.S. economy. Employment gains in this sector are a bright spot.
Severino: Real estate continues to fare well as an industry. Economic growth is supporting fundamentals, while interest rates have not risen enough to be truly disruptive. I suspect growth in the industry should continue until things in the economy start to slow. If we end up in a commercial real estate (CRE) bubble, the downturn for CRE employment could get nasty.
REBO: Average hourly wages for private-sector workers grew 3.2 percent in April on a year-over-year basis, matching the prior month’s increase. Can you put into historical perspective the pace of wage growth and what, if anything, this means for inflation in the near term?
Nelson: Unlike many economic indicators like GDP, wages are generally reported in nominal terms — that is, not adjusted for inflation. And in nominal terms, wages have indeed been weak in this cycle. But so has inflation. Thus, measured on a real basis, wage growth has actually been pretty decent in this cycle
But that begs the question as to why this historically tight labor market has not been more inflationary. One reason is that there’s more slack in the job market than is measured by the unemployment rate alone because the labor force participation rate is well below its peak level reached two decades ago (i.e. a smaller share of Americans are working).
Another reason is the “Amazon effect” — the impact Amazon is having on keeping down inflation due to great price transparency and competitive retail pressures.
Ryan Severino, chief economist for JLL
Severino: People who think wages are growing slowly are missing the picture. During the last cycle, year-over-year wage growth topped out at about 3.6 percent and people were not lamenting low wage growth back then. In February, year-over-year wage growth reached 3.4 percent, so that’s not far from the last cycle’s pace.
Moreover, with inflation lower this cycle, real wage growth is roughly in line with last cycle. Yes, the breakdown between management and non-management is different, and that could be a contributing factor to tame inflation. But inflation is an incredibly complex thing, a function of so many different economic phenomena. Distilling inflation down to one factor is impossible these days.
REBO: What are the ramifications of such a low unemployment rate currently pegged at 3.6 percent, and do you think it could fall further?
Severino: The unemployment rate is low enough to continue to produce solid wage growth, even if it is not always declining for good reasons. I expect that the unemployment rate will fall a bit further before hitting bottom.
— Matt Valley