For the second month in a row, U.S. nonfarm payroll employment experienced a big increase, according to the latest figures from the Bureau of Labor Statistics (BLS).
In June, employers added 287,000 net new payroll jobs, beating economist forecasts by more than 50 percent. The job gains in July generated more positive headlines, as employers added 255,000 new payroll jobs, once again blowing away economist forecasts that predicted 180,000.
These numbers are especially welcome after a disappointing May, where job growth of 24,000 fell well short of predictions.
REBusinessOnline asked two economists — Robert Bach, director of research for Newmark Grubb Knight Frank, and Ryan Severino, senior economist and director of research for Reis — what this news means for the commercial real estate industry as a whole.
REBusinessOnline: The employment data has looked fairly healthy in the last few months. Yet, U.S. gross domestic product (GDP) increased at a 1.2 percent annual rate in the second quarter (subject to revision), which isn’t terrific. What are we to make of these seemingly mixed signals about the health of the economy?
Ryan Severino: GDP has never been the best measure of the health of the economy. That’s not really what it was intended to do, though that is what it has become. Either way, one data point in isolation can often be misleading so it is always better to take data in concert rather than in isolation. When we do that, the economy still looks pretty good.
Robert Bach, Newmark Grubb Knight Frank
Robert Bach: I’ve heard the argument that GDP does have some measurement issues related to the adaptation of technology, which also causes measurement issues with productivity. But sometimes GDP and job growth just don’t correlate well from one period to the next. You can get periods of strong GDP/weak job growth and vice versa, but it usually balances out over time. It does surprise me that hiring is so strong while corporate profits and business cap-ex (capital expenditures) are so weak, but a lot of that weakness is in the energy sector. Consumer-related sectors and businesses that don’t rely on exports are pretty healthy, and they’re the ones hiring.
REBO: I noticed that government jobs accounted for 38,000 of the 255,000 total increase in nonfarm payroll jobs in July. Much of the gains in government were local government (30,000). The number of government jobs being created is occurring at a modest clip after a long period in which government jobs were either being shed or little hiring was occurring in that sector. Are these hires making up for lost time?
Bach: I don’t think the increase speaks so much to widespread increase in local government hiring — although some of that is happening since home prices are rising, pushing up property tax revenues. But the July report shows 21,600 of those 30,000 local government jobs were in education, which suggests to me some seasonal adjustment issues around summer school.
Severino: A lot of the austerity of the past has clearly ended and governments are realizing that they need larger staffs to keep pace with the demand that they are seeing. Governments can stop hiring, but that doesn’t halt population growth, the aging of society, etc., all of which puts more demand on government services.
REBO: The BLS report shows a nice spike in the leisure and hospitality segment in July (45,000). Does that reflect the height of tourism season? Does that mean more good times ahead for hotels in terms of revenue per available room, average daily rate, etc.?
Severino: Hotels have more supply-side issues in some markets today than demand-side issues. Development in some markets (like New York) has really ramped up because hotels were performing so well.
Bach: I think it probably does reflect that — maybe more summer tourism compared with recent years, which is surprising because you’d think the strong dollar and weak global economies would suppress global travel. Keep in mind about half that total is in food services and drinking places, which doesn’t necessarily point to increased tourism so much as the general health of consumer spending. With plentiful jobs/rising wages, strong home price gains, low gas prices and rising credit balances, consumers are spending more.
REBO: What will it take to boost the labor participation rate, or is that not a pressing concern? According to the BLS, both the labor force participation rate, at 62.8 percent, and the employment-population ratio, at 59.7 percent, changed little in July. My understanding is that labor force participation rate is near historical lows.
Bach: It’s one of those economic statistics that gets dragged into the political arena. I never saw it as the pressing concern that others have. Maybe half of it is due to the aging labor force opting (or having) to retire. Some analysts would point to the fact that the participation rate is historically weak even among younger workers, therefore the economy isn’t generating enough jobs and/or unemployment insurance and welfare payments are too generous. Rising wages will boost the participation rate, and we’re starting to see that — but it won’t rise very much.
Ryan Severino, Reis
Severino: There are cyclical and structural forces at play here. As baby boomers retire, that is lowering the participation rate. But also there are many people who are being left behind by the economy as it evolves, especially in manufacturing. This has quietly been going on for decades. However, instead of fixing this issue we papered over it with the cheap and plentiful debt. Now that era has ended and society is waking up to the fact that many people are being permanently left behind. So there is a longer-term issue here, but no one is really addressing it.
REBO: Does the strong June/July mean the May jobs report (revised to +24,000 from +11,000 but still quite low) was the real outlier?
Severino: May’s figure is clearly an aberration. June and July being strong isn’t that much of a surprise. The economy created 233,000 jobs in February and as recently as the fourth quarter was creating jobs at a pace close to 300,000 per month. If you remove May’s figure, the monthly job gain is 204,000. That’s slower than last year, sure, but this is the seventh year of economic expansion and we are near full employment. If anything, the fact that we are creating this many jobs this far into an expansion shows how strong and durable the labor market recovery has been.
Bach: Yes, May was an outlier. The three-month moving average provides a better gauge of the underlying momentum in the labor market: 190,000, right on par with the year-to-date average of 186,000. That’s pretty darn good this late in the expansion cycle, especially considering the low rate of growth in the population and labor force overall. There’s evidence to suggest that some discouraged workers are returning, which will continue to provide some support for the labor force participation rate.
REBO: Against this backdrop and low interest rates, are there more good times ahead for commercial real estate?
Bach: I believe there are. I’ve been calling this the golden era of real estate for some time. This has proven to be the economic expansion that nobody loves, kind of like the stock market that climbs a wall of worry. That’s when you get the sustained increases, and this economy has laid the foundation for this gradual, sustained recovery and expansion in the real estate cycle. Tighter lending standards for new projects should keep the market in good shape.
As someone who lived through the industry collapse in the late 1980s and early 1990s, I’m pleased to see how well the industry is performing on all fronts. You can even take it a step further by observing how cities and suburbs have improved over the past few decades. Developers have excelled at revitalizing cities by providing exciting, mixed-use districts where people want to work and live — Millennials, Boomers and everyone in between. Suburbs have gotten a bad rap, but many are emulating the development and redevelopment framework that has led to the success of CBDs such as transit-oriented development, the revitalization of suburban downtowns, etc.
Severino: Yes. There is nothing out there likely to kill off this expansion in the economy in the near term unless we get some idiosyncratic shock like political risk. Although the multifamily sector is dealing with significant construction volumes, the other major property types are poised for ongoing improvement.
— Matt Valley