By Matt Valley
Will the U.S. economy avoid a fourth consecutive mid-year slowdown? If the nonfarm payroll employment report for April is a harbinger of what’s to come, there will be no rerun this year. Employers added 165,000 net new payroll jobs overall in April, according to the Bureau of Labor Statistics (BLS), including 176,000 in the private sector. Just as significant, the job gains for the prior two months were revised upward by a combined 114,000 jobs.
But economic headwinds still persist. Data on factory orders and international trade have softened recently, and retail sales remain choppy, according to Bob Bach, national director of market analytics for Newmark Grubb Knight Frank.
“Moreover, sequester-related spending cuts, which are unfolding gradually, will knock about 0.6 points off of gross domestic product this year,” adds Bach.
Real gross domestic product in the United States increased at an estimated annual rate of 2.5 percent in the first quarter of 2013. In each of the past three years, relatively solid GDP growth early in the year has been followed by a slowdown in either the second or third quarter.
In some ways, the April jobs report was a mixed bag. One positive sign is that average hourly earnings for employees in the private sector increased an average of 0.2 percent in April. Meanwhile, the average work week for employees in the private sector dipped slightly from 34.6 to 34.4 hours, a negative indicator.
REBusinessOnline.com (REBO) asked Bach and Ryan Severino, senior economist at Reis, to assess the highs and lows of the April jobs report and the impact on commercial real estate.
REBO: The April jobs report shows healthy jobs gains in leisure/hospitality (+43,000), food services and drinking places (+37,900), and retail (+29,300). There were also gains in education and health services (+28,000) and professional and business services (+73,000). That said, does the composition of the job gains overall concern you at all? Leisure and hospitality jobs, for example, generally aren't career-type jobs for many Americans.
Bach: I would like to see more growth in manufacturing, construction and mining, all of which pay higher-than-average wages, but none of which added jobs in April. Construction and mining clearly are ascending, so April was a blip. Manufacturing is struggling a bit due to a slowdown in exports.
Any growth is good growth, so I’ll take what I can get. Also, growth in food service jobs, for example, means that people have discretionary income to dine out. Growth in retail jobs means retailers anticipate sales.
Severino: Ideally, we would like to see more professional jobs, especially since everyone has heard stories about people taking jobs where their qualifications far exceed what is required. Moreover, a significant percentage of the jobs created [in April] were part-time jobs when many of the people taking these jobs would prefer full-time jobs.
If the economy continues to improve, a number of these jobs will become full-time jobs, but companies aren’t willing to commit just yet. So yes, it’s still too few jobs being created and the quality is not there yet, but things continue to improve.
REBO: Revised figures from the BLS show that nonfarm payroll employment rose by 138,000 in March, up from the initial estimate of 88,000. Similarly, job gains in February were revised upward from 268,000 to 332,000. Was Wall Street’s positive reaction to the April jobs report because the employment numbers were so robust, or was it a sigh of relief that the job growth figures beat expectations?
Bach: It was a good report. Note that the upward revision to the February job gains by the BLS made that month the strongest since May 2010 when the U.S. Census Bureau was staffing up for the 2010 Census, and it was the second strongest month since November 2005. That’s good in anyone’s book.
But there was a big sigh-of-relief component to it because other indicators were coming in below expectations and signaling a deceleration in the economy — another spring soft patch. Retail sales, manufacturing and international trade all suggested slower growth. We’re not out of the woods there.
This recovery has been a worrisome one, a roller coaster, raising hopes for a few months and then dashing them, sometimes raising fears of a double-dip. It’s like a plane that’s flying too close to the ground. If the plane is flying at 35,000 feet and the pilot moves to 30,000 feet, no one notices the change in altitude. But if the plane is flying at 10,000 feet and sinks to 5,000 feet, the ground looks a lot closer.
But through all of this, the bottom line is that the economy continues to get better, just not as fast as we would like. The financial crisis shook the world to the point where everyone is looking for the next recession. But it hasn’t shown up yet. So far so good, and conditions have been great for a lot of people and companies in commercial real estate.
Severino: After the revisions by the BLS, the trajectory of the labor market over the last eight months looks heartening, if not spectacular. The three-month moving average has been above 200,000 jobs since December. But I do think there was also a big sigh of relief. After the March report, many thought that yet another “spring swoon” was in the cards.
April helped to assuage some fears that we would avert a spring slowdown. That’s not just because of the employment gains in April, but also because of the revisions by the BLS to the February and March figures. Job gains in February now stand above 300,000, which is significant, and March looks more like a dip than an implosion.
REBO: Employment in the manufacturing sector in April was essentially unchanged from March. Why aren’t we seeing job gains in manufacturing?
Bach: The auto industry continues to add jobs, but other manufacturing sectors have shown some weakness. It looks like durable goods, of which autos are a part, have softened probably due to weaker exports and lower inventories.
Severino: Manufacturing is being squeezed by both the situation in Europe, which is dampening demand for exports of American manufactured goods, and sequestration, which is causing some manufacturing firms to institute hiring freezes, if not layoffs. Demand for goods and services, along with higher profits, do not automatically translate into jobs. Just look at the experience of Corporate America during the last few years — strong profits and balance sheets flush with cash, but little hiring.
REBO: What does the April jobs report mean for the office market?
Severino: The improvement in service-producing industries — especially business services — bodes well for the office sector if it can maintain this momentum, which of course remains to be seen. Realistically, it will probably be late this year or early 2014 before we see a meaningful acceleration in this sector of the labor market and its impact on the office sector. That said, with so little office space being built, any upside surprise in the labor market will translate into an acceleration in the pace of improvement in office [real estate] fundamentals.