Matt Valley
The U.S. labor market has hit a “pothole,” according to Robert Bach, national director of market analytics for brokerage firm Newmark Grubb Knight Frank, raising new questions about the pace of recovery in the near term. Employers added 88,000 net new payroll jobs in March, well below expectations for around 200,000 and below the four-month average of 221,000 from November through February.
“[The report] from the Labor Department indicates the recovery will continue, but not at the accelerated pace that some indicators earlier in the year had suggested,” wrote Bach in a research note Friday shortly after the Bureau of Labor Statistics released the nonfarm payroll employment figures for March.
The unemployment rate slipped from 7.7 percent in February to 7.6 percent in March, its lowest reading since December 2008. However, the unemployment rate declined for the “wrong reason,” points out Bach, as the labor force fell by 496,000. The labor force participation rate sank to 63.3 percent, its lowest level since May 1979, as many discouraged job seekers ended their searches and baby boomers retired.
The decline in job creation last month was not totally unexpected, pointed out the veteran economist. The ISM manufacturing and nonmanufacturing indices, the ADP employment report and initial unemployment insurance claims all signaled some weakness. Bach lists some possible explanations for the disappointing jobs report:
* The impact of the sequester spending cuts, although the brunt of these won’t be felt until the second quarter
* The possibility that employers are adding fewer positions ahead of the implementation of the Affordable Care Act
* A delayed impact from the payroll tax hike implemented at the beginning of the year, pushing retailers to reduce their staffing
* The cooler-than-normal March in many parts of the country, which hurt home improvement stores and other retailers selling seasonal goods
Ryan Severino, senior economist for New York-based Reis, says that it is improbable that sequestration had much, if any, impact in March. “The fallout from sequestration will be felt in the second and third quarters of this year, given the inevitable impact it will have on the economy due to furloughs, which will reduce income and spending for those who do not lose their job outright, layoffs in the government and government subcontractors, and hiring freezes.”
If there is any silver lining, it is that the economy is in a stronger place this year than at the same point in the last few years given the recovery in the housing market, points out Severino. “This year, housing-related employment is likely to have its greatest contribution to the labor market since before the recession. Monthly job gains will likely slide back into the range of 140,000 to 170,000 per month over the next two quarters as the economy stomachs sequestration.”
Commercial real estate impact
The apartment sector continues to hum, regardless of the month-to-month vagaries in the labor market, emphasizes Severino. The vacancy rate nationally contracted another 20 basis points to 4.3 percent during the first quarter and remains at its lowest level since late 2001, according to Reis.
The slowdown in hiring is not good news for the office sector, says Severino. “The office market was already struggling to generate marginal vacancy compression, contracting by only 10 basis points to 17 percent nationally during the first quarter.”
Professional/business services added fewer jobs in March than in February (51,000 vs. 80,000). “These jobs tend to be office-using employment, and their recovery is pivotal for the office sector,” emphasizes Severino.
Meanwhile, retail continues its “torpid” rate of improvement, observes Severino. “Demand for space is so exiguous that even in the continued absence of new construction, vacancy compressed by only 10 basis point in the first quarter.” The national vacancy rate for neighborhood and community centers dropped to 10.6 percent in the first quarter, according to Reis.
“Retailers are not going to lease space en masse until widespread demand for their products returns, and that will not happen if the labor market continues to improve in such a feeble manner,” says Severino.
The industrial sector continues to improve, but also at a tepid pace. The overall performance of the labor market is important to the warehouse/distribution subsector because greater demand for goods translates into greater demand for space, says Severino.
“However, the relationship between industrial fundamentals and the labor market is more directly felt in the flex/research and development subsector because most of the tenants in that space are small- to medium-sized organizations. Although hiring among firms of this size has picked up in recent months, it is still below the level sufficient to generate a marked improvement in fundamentals,” says Severino.
Job sector highlights
* Professional and business services led with 51,000, bolstered by a gain of 20,300 in temporary hiring.
* Education and health services added 44,000 jobs, of which 23,400 were in healthcare — the key demand driver for medical office buildings and other healthcare properties.
* The construction sector added 18,000 in both residential and nonresidential construction.
* Leisure and hospitality gained 17,000, a positive indicator for hotels.
* Manufacturers created 4,000 jobs, below recent averages.
* On the negative side, trade, transportation and utilities shed 27,000 jobs, of which 24,100 were retail positions.
Bach concluded that the subpar nonfarm payroll employment in March could have been payback for the robust 268,000 jobs added in February.