WASHINGTON, D.C. — The construction industry added 17,000 jobs in October, the fifth consecutive monthly increase and the largest since January. That trend bodes well for the U.S. housing market and the broader economy, says Victor Calanog, head of research and economics at New York-based Reis.
“That is an important development because it shows that the recovery in residential and commercial real estate is gaining momentum. The economy will not fully recover until housing recovers, so that is a welcome result,” says Calanog. The construction industry has added 29,000 total jobs over the past five months after shedding jobs for much of the year.
Reconstruction spending following Hurricane Sandy will provide a near-term boost to construction jobs, adds Calanog, but that will be ephemeral since other projects will probably be put on hold as resources are reallocated.
Total nonfarm payroll employment grew by 171,000 in October, the Bureau of Labor Statistics (BLS) reported last Friday. The net gain of 184,000 jobs in the private sector was offset by a loss of 13,000 government jobs. In addition, job gains for August and September were revised upward by 84,000.
“The 184,000 increase in private sector jobs is a welcome improvement, and further supports the case I fought for starting two years ago that we are in a sustainable but below trend — at times painfully slow — recovery,” says Hessam Nadji, managing director of research and advisory services at Encino, California-based Marcus & Millichap.
It will take two more years before the unemployment level, which currently stands at 7.9 percent, drops to a healthier level, Nadji adds. That assumes the federal government avoids the fiscal cliff, which is aseries of major tax hikes and spending cuts that will go into effect at the beginning of 2013 if Congress doesn’t act.
At the end of this year, the temporary payroll tax cut is set to expire, resulting in a 2 percent tax increase for American workers. Certain tax breaks for businesses are also set to expire along with the Bush tax cuts. At the same time, taxes related to the new healthcare law will go into effect. Combined, these increases total hundreds of billions of dollars.
The labor market has finally reached the halfway point in its recovery, recouping just over half of the 8.8 million jobs lost to the Great Recession, says Bob Bach, national director of market analytics for Newmark Grubb Knight Frank.
“The economy is most certainly not out of the woods yet with the fiscal cliff looming and business capital spending looking precarious,” emphasizes Bach. “But consumers may be ready to step in and keep the economy afloat for the time being until legislators come up with at least a temporary fix to the fiscal cliff, hopefully accompanied by a long-term plan for reducing deficits.”
Reason for optimism
A number of economic indicators released last week are positive, says Bach. Personal income grew 0.4 percent in September, the fastest growth since March. Meanwhile, consumer spending rose 0.8 percent, the best performance since February. “The gain in consumer spending is particularly important because it accounts for about 70 percent of the total U.S. economy as measured by GDP.”
The S&P/Case-Shiller Home Price Indices shows housing prices are rebounding, with the 10-city and 20-city composites both rising by 0.9 percent in August and up by 1.3 percent and 2 percent, respectively, during the past year.
Consumers are also feeling better, says Bach. The Thomson Reuters/University of Michigan final consumer sentiment index climbed to 82.6 — the highest since September 2007 — from a reading of 78.3 in September.
But business investment remains weak, according to the U.S. Commerce Department. Why is there such a disconnect between business investment and consumer confidence?
“Business confidence remains fragile because of concerns over the serious risks, such as the potential fiscal cliff and the banking crisis in Europe,” explains Calanog. “The average consumer is either blissfully unaware of these risks, or he or she is not comprehending them in the same manner that businesses are.”
Bach echoes Calanog’s comments. “Businesses appear to be taking the fiscal cliff, election worries and the euro zone financial crisis more seriously than households, which appear to be more focused on the nascent housing market recovery.”
Inside the Numbers
Professional and business services added 51,000 jobs in October, followed by retail (36,000), healthcare (31,000), and leisure and hospitality (28,000), construction (17,000) and manufacturing (13,000), according to BLS. The manufacturing sector has added approximately 175,000 jobs in the last year.
The number of persons who are involuntarily employed part time for economic reasons fell by 269,000 to 8.3 million in October. “Unfortunately, the majority of the jobs being created — whether full time or part time — continue to be low-wage jobs,” says Calanog.
“With that said, we’re moving in the right direction, and the lack of full-time job positions may be reflective of employer uncertainty about the trajectory of the recovery and the upcoming elections. That uncertainty should lessen over time, barring unforeseen shocks,” he adds.
In October, the number of long-term unemployed — person who have been jobless for 27 weeks or more — was little changed at 5 million. These individuals accounted for 40.6 percent of the unemployed.
Office sector still struggling
Not only is job growth still relatively weak, a significant percentage of the jobs being created are not in the office-using sectors of the economy, emphasizes Calanog. “Overall office fundamentals reflect this slow healing process, with office vacancies falling by only 20 basis points from 17.3 percent to 17.1 percent year-to-date through the third quarter.
Marcus & Millichap’s Nadji believes that the office recovery, which has been a laggard due to excess space and an aggressive effort by many tenants to reduce their overall footprint, will finally show measureable improvement next year if the fiscal cliff is avoided.
Nadji also observes another trend in the nonfarm payroll employment figures. Temporary jobs this year have accounted for about 10 percent of total job creation, down from 30 percent in 2010. “It does show caution and nervousness by companies.”
Although the 171,000 nonfarm payroll jobs created in October easily beat the consensus estimate of 125,000 and the goods-producing sectors are looking up, one month’s worth of data is never a game changer, emphasizes Bach.
“It’s encouraging, but there have been so many false starts in the labor market recovery that it’s better to take a wait-and-see attitude, particularly as Congress begins to wrangle over the fiscal cliff.”
— Matt Valley