By Matt Valley
After what economist Bob Bach describes as a “clunker” of a nonfarm payroll employment report for December 2013, Wall Street and business executives everywhere are holding their collective breath in anticipation of this Friday’s jobs report to be released by the Bureau of Labor Statistics (BLS) at 8:30 a.m. EST.
Bach, national director of market analytics at Newmark Grubb Knight Frank, will be looking closely for possible upward revisions by the BLS to the 74,000 net new payroll jobs created in December, which fell below expectations of approximately 200,000. Private sector growth of 87,000 in December was partially offset by a loss of 13,000 government jobs.
Many analysts say the brutal cold and snowy weather, particularly in parts of the Midwest and Northeast, negatively skewed the employment picture in December. The extremely harsh weather continued into the new year, which could bode ill for the January employment report.
Detroit Metropolitan Airport recorded 39.1 inches of snow in January 2014, trouncing the old record of 29.6 inches set in January 1978. In fact, it was Detroit’s snowiest month ever, eclipsing the old record of 38.4 inches set in February 1908.
The unemployment rate plunged from 7 percent in November to 6.7 percent in December. This was due both to an increase in the number of people who said they worked during the survey week (+143,000) and a sharp decline in the labor force (-347,000), according to Bach. The labor force participation rate sank two-tenths of a point to 62.8 percent, tying October’s 35-year low.?
Following the release of the December jobs report, REBusinessonline.com conducted a Q&A with Bach about the unexpectedly weak headline number and where the U.S. economic recovery stands today.
REBO: Are commercial real estate borrowers among the winners as a result of the December jobs report because it likely means rates will hold steady, or dip slightly, in the near term?
Bach: I don’t think one disappointing report can reverse the tide of rising interest rates unless more economic reports follow suit, in which case the view that the economy is accelerating (the recent consensus by many analysts) could be called into question. If the economy remains mired in the slow-growth mode where it has been since the recession ended, there could be a pause in the upward trajectory of interest rates.
REBO: The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour to 34.4 hours in December. Does that figure indicate that the existing workforce is still not stretched too far — that employers can still afford to hold off from hiring more workers?
Bach: The average workweek doesn’t change much. The average during 2013 was 34.5 hours, the same as 2012. Temp hiring is a more interesting indicator of the trend you are citing. Employers added 40,400 temp jobs in December, the highest since December 2010. Monthly temp jobs trended higher in 2013, averaging 20,600 versus 14,500 in 2012 and 12,400 in 2011.
This suggests to me that the full-time workforce is stretched to the max, and employers are adding temp jobs at the margin because they remain leery of taking on full-time workers until demand is rising consistently and healthcare [Affordable Care Act] is straightened out.
REBO: Construction employment edged down in December (-16,000). Was that due to unusually cold weather in parts of the country as the BLS suggests, or are other factors at work?
Bach: I think it was the weather because both commercial construction and housing starts are trending higher. Existing home sales were down in November, probably due to rising mortgage rates, but new home sales were decent.
REBO: In 2013, job growth averaged 182,000 per month, about the same as in 2012 (+183,000 per month). What is your expectation for 2014? Was the similarity between 2012 and 2013 a surprise to you?
Bach: I’m forecasting 200,000 per month in 2014. I was expecting slightly higher growth in 2013 than what we got. It could be that this is as fast as we can go in this recovery cycle. The labor market may be unable to rev up much higher. We’re likely to hit a new peak in the middle of the year, meaning we’ll have recovered the 8.7 million jobs lost to the recession. But the labor market will still be stressed because the number of people looking for a job expanded over the past six years.
REBO: Employment in professional and business services rose in December (+19,000). In 2013, job growth in professional and business services averaged 53,000 per month. What jobs fall under the umbrella of professional and business services, and why has that sector shined relatively speaking?
Bach: The professional and business services sector includes many subsectors that create demand for office space: legal, accounting, architects and engineers, computer systems and services, technical consultants, and management services. The sector is important to the office market because the financial services sector, a traditional driver of demand for office space, has lagged as banks come under increased regulatory scrutiny and rising interest rates eat into the mortgage refinancing business.
The recent performance is less impressive when you consider that the sector also includes temp jobs, which grew by 32,000 per month last year, or 38 percent of the total. In December, temp jobs increased by 40,400, while other professional and business services jobs fell by 21,400. I would argue that companies discount temp jobs when deciding how much space to lease.
REBO: Manufacturing employment continued to trend up in December (+9,000). Are you encouraged by the trends in this sector overall?
Bach:I am, but it’s not a game changer for the economy or labor market overall. The sector added 77,000 total jobs last year, its fourth year of growth following 12 consecutive years of decline. Last year’s total was down from 154,000 in 2012 and 207,000 in 2011.
Manufacturers will continue to hire in 2014 thanks to improving exports, business capital expenditures and consumer spending. Manufacturing output will continue to rise, but the potential for job creation is relatively small due to increasing productivity. The United States is a service-driven economy, and manufacturing will be more of a niche player in the labor market than it was a generation or two ago.
REBO: Are you concerned about the labor participation rate, or is that figure getting too much attention? It now stands at a 35-year low at 62.8 percent.
Bach: I am concerned, but the figure isn’t as bad as it sounds because about half of the decline is being driven by retiring baby boomers who are leaving the labor force. It’s not a pure measure of the distress in the labor market. Other indicators might be a better gauge of that distress, such as average weeks unemployed (36.6 weeks in December, down from the average of 39.4 in 2011 and 2012, but well above the average of 16.9 in 2007, the year before the recession).
REBO: I know in the past that you've said that the unemployment rate can be misleading. It's now down to 6.7 percent. Should we be encouraged by that figure?
Bach: We should be encouraged, but again, some of that improvement is due to discouraged workers leaving the labor force, including people who are retiring earlier than they intended. About one-third of the decline from November (7 percent) to December (6.7 percent) was due to more people working, while two-thirds was caused by people dropping out of the labor force and no longer being counted as unemployed.