By Matt Valley
Any fears of a slowdown in the U.S. labor market in the wake of sequestration and higher payroll taxes were put to rest last Friday — at least temporarily — when the Bureau of Labor Statistics reported 195,000 net new payroll jobs in June. In addition, the totals for April and May were revised higher by a combined 70,000, raising the average monthly increase through the first half of the year above the 200,000 threshold. The private sector added 202,000 jobs in June, offset by a loss of 7,000 government jobs. The unemployment rate held steady at 7.6 percent.
Sectors posting healthy job gains included leisure and hospitality (+75,000), professional and business services (+53,000), retail trade (+37,100), and healthcare and social assistance (+23,500). Besides government, some key sectors shedding jobs included educational services (-10,600), manufacturing (-6,000), transportation and warehousing (-5,100), and information (-5,000).
REBusinessOnline spoke with Bob Bach, national director of market analytics for Newmark Grubb Knight Frank, and Ryan Severino, senior economist at Reis, to gain a clearer perspective on the state of the employment market.
REBO: The leisure and hospitality sector led all employment categories in June with 75,000 net new jobs. Why is the hotel sector, which has been adding jobs at a healthy clip for months, experiencing such robust growth?
Bach: Hotels are doing well thanks to growing consumer and business spending. The bigger story in that sector is food services and drinking places, which sustained a mild blow during the recession and are now setting new highs — up 4 percent during the past 12 months versus 1.4 percent for accommodations (hotels) and 1.7 percent for total nonfarm payroll employment. Consumer spending has been resilient despite higher payroll taxes at the beginning of the year.
Severino: There has been a recovery in hospitality during the last year or so. The majority of that is due to business-related travel and also some leisure travel, which is being propped up by resilient, if not spectacular, consumer spending. Anecdotally speaking, I’ve traveled a lot this year. My flights are almost always full and the hotels that I stay in have very little, if any, available rooms.
REBO: What’s the biggest takeaway from the June jobs report in your view?
Bach: The fact that monthly job growth averaged just above 200,000 through the first half of the year is kind of a big deal — especially with the headwinds from government policy and slower global growth. Federal Reserve Chairman Ben Bernanke wants to see four consecutive months above that 200,000 level before the Fed begins to reduce its bond purchases. While the labor market hasn’t done that per se, it’s come awfully close.
Now Bernanke and his successor have to land the plane, meaning they have to tighten monetary policy so that financial markets can price the cost of capital versus risk without the Fed’s thumb on the scale. And they have to do this as gently as possible without excessive volatility. This has some pretty obvious ramifications for not only the real estate capital markets but also the leasing markets as companies decide whether to borrow at higher rates in order to grow their business and expand their property footprint.
Severino: The resiliency of the labor market in the face of fiscal policy contraction is a remarkable thing. We have not experienced the spring swoon in the labor market this year that we experienced the last few years, which is all the more noteworthy in the face of rising taxes and spending cuts. Private payrolls continue to increase despite Washington’s best efforts — intentional or otherwise — to stymie this growth. All in all, it’s been a pretty solid showing on the part of the labor market.
REBO: In light of the better than expected job growth we’ve witnessed during the past several months, is the argument that sequestration (automatic budget cuts) is having an ill effect on our economy being proven wrong?
Bach: No, the CBO (Congressional Budget Office) said sequestration would reduce GDP by 0.6 percent. I’ve seen estimates as high as 2 percent, if you include the effects of the tax hikes. So, those measures are restraining growth.
Severino: I would argue that job growth and economic growth would be even higher without sequestration and tax increases. I honestly think there is more fiscal restraint, both current and projected, due to the tax increases, but the sequester hurts because there are layoffs in the public and private sectors, hiring freezes and furloughs. Has the impact of the sequester been overstated, especially vis-à-vis the impact that tax increases are likely to have? Probably a bit, but it is still a drag on the economy and the labor market nonetheless.
REBO: The underemployment rate — which includes people who stopped looking for work and part-time workers who prefer full-time jobs, as well as the unemployed — jumped to 14.3 percent in June from 13.8 percent the prior month. The number of involuntary part-time workers increased by 322,000 in June to 8.2 million. Is that underemployment rate actually a positive sign in that it indicates that more people are looking for full-time work and are less discouraged than they were previously? Or is it simply a troubling high figure because it underscores that our pace of job creation is insufficient to keep up with demand?
Severino: Generally, I would say this increase in the underemployment rate is a bad thing. It likely means that the number of workers employed part time on an involuntarily basis and the number of discouraged workers increased substantially.
Bach: It’s both, really. It’s a good sign that people are getting jobs, both part time and full time, and that more people are piling into the labor force because they’re more optimistic. But it also says that the labor market recovery still is not as strong as we would like. Given the overall tone of the report, I put more emphasis on the former interpretation.
Keep in mind that the household survey is volatile, and I’m reluctant to read too much into the 322,000 number since there could be seasonal adjustment issues related to the end of the school year. The more reliable establishment survey (larger sample size) showed that part-time job creation was low last month at 9,500, about half the monthly rate through the first five months of the year. That said, the 322,000 number could be taken as evidence that employers are trying to avoid the requirements of the Affordable Care Act by substituting part-time workers (less than 30 hours per week) for full-time workers.
REBO: Bob, the headline on your research note highlighting the June employment trends simply states, “The Great Rotation.” What does that mean exactly in the context of commercial real estate?
Bach: Stock market analysts talk about the “great rotation” from bonds into stocks, which may be a misnomer. But for commercial real estate, there is no doubt that a rotation is occurring as the cycle transitions from a phase of low interest rates and sluggish growth (recovery) to rising interest rates and stronger growth (expansion).
Returns are dependent on two components: appreciation and income. Rising interest rates and mortgage rates are likely to dampen future appreciation, but this will be offset to some extent by rising occupancies, rental rates and net operating incomes if (1) the labor market continues along its current path and (2) developers and lenders maintain discipline in adding new supply.