CCIM Economist Analyzes Job Gains in March, Plus Interest Rate Outlook

After a subpar jobs report in February, one might say that the U.S. employment market came into March like a lamb but went out like a lion. Employers added 196,000 jobs in March, according to the Bureau of Labor Statistics (BLS), with notable gains in healthcare and in professional and technical services. The headline number was a big improvement over the 33,000 jobs added in February and brought the longest streak of employment growth on record to 102 months.

More specifically, the healthcare sector added 49,000 jobs in March and 398,000 over the past 12 months. Employment in professional and technical services grew by 34,000 in March and 311,000 over the past year.

The leisure and hospitality sector also fared well in March by adding 33,000 jobs. Meanwhile, the national unemployment rate was unchanged at 3.8 percent.

K.C. Conway, Chief Economist, CCIM Institute caught up with K.C. Conway, chief economist at the CCIM Institute, for his take on the health of the economy, its impact on commercial real estate and what he thinks might be the Federal Reserve’s next move on interest rates.

What follows is an edited version of Conway’s remarks:

REBusinessOnline: Do you subscribe to the takeaway expressed by some pundits that the March jobs report was basically a “Goldilocks Report” — not too hot, not too cold, but just right? Do you think the Federal Reserve will keep the federal funds rate where it is in the wake of the latest job figures?

K.C. Conway: I don’t consider it a “Goldilocks Report,” but a “more-of-the-same report” in which the U.S. is continuing to produce monthly jobs at a rate of just shy of 200,000. On a first-quarter basis, the ADP National Employment Report shows an average monthly increase of 196,000 jobs compared with 180,000 for the BLS. The BLS data tends to be volatile and heavily revised for three to six months as it is based on a household survey. The ADP reflects the real sector of the U.S. economy — the private sector — and it is an actual count by the entity processing the most payrolls in the United States.

Regarding the Federal Reserve, it is fixated on one single metric. Believe it or not, that metric is not GDP, CPI inflation or job growth, but rather the spread between the two-year and 10-year Treasury yields. At just 15 basis points, the Fed can’t move rates up until a normal yield curve is re-established (a spread of 80 to 120 basis point between the two-year and 10-year Treasury yields). The Fed would cut rates if the yield curve inverted for a sustained period of 30 to 90 days versus the short blips we have experienced.

Monitor the spread between the two-year and 10-year Treasury yields to know the Federal Reserve’s next move. Pay the most attention to the speeches and comments of Jim Bullard and Esther George, respective presidents of the Federal Reserve Bank of St. Louis and Kansas City. Both are voting members of the Federal Open Market Committee (the Fed’s monetary policymaking body).

Bullard and George seem to really understand the importance of the yield curve and inverting it. They do their homework and utilize industry data to supplement government-produced data.

REBO: Are the 12-month gains in healthcare considered robust from a historical perspective? What factors are driving the growth of the healthcare sector? Is it simply a matter of demographics — the U.S. gaining population each year with everyone in need of healthcare — or are other factors at play?

Conway: It is considered robust compared with other sectors and against the backdrop of discussions once again surrounding the scrapping of the Affordable Care Act. The drivers of healthcare are not just U.S. demographics and an aging baby boomer generation, but also the reinvention of how we deliver healthcare in the United States. Technology is driving a lot of the capital expenditures and hiring.

The growth is bifurcated between big metros and rural areas. We are shuttering hospitals in rural areas at an alarming rate, and our rural communities are certainly not seeing growth in healthcare jobs or services. This sector in the monthly BLS report needs to be broken down more to understand that the growth is driven more by technology and on the backs of efficiency gains, service cuts and hospital closures in rural areas.

REBO: The leisure and hospitality segment added 33,000 jobs in March, or nearly 17 percent of the 196,000 jobs created during the month. During this long economic expansion, we’ve continued to see steady gains in this sector. What have been the drivers of this job growth?

Conway: Leisure and hospitality continue to do well despite being late in the cycle in terms of new supply and growth in every metric from ADO (average daily occupancy) to RevPAR (revenue per available room).

Now is not the time to be long on an asset that has added supply and benefitted from tremendous growth. Hospitality is always the first sector to get hurt when the economy reverses course, as the property sector prices its real estate nightly and travel is the first discretionary item to be cut by both consumers and businesses when it comes time to tighten the belt.

Now is the time for the hospitality industry to think somewhat defensively by taking steps like refinancing debt at these low interest rates. One caveat: we are just one trade deal away from hospitality being on a continued run. If a trade deal is reached with China and the U.S. ratifies the United States-Mexico-Canada Agreement (the North American Free Trade Agreement was the forerunner) this spring, hospitality’s bull run could have legs for another year or two.

REBO: The retail sector shed 11,700 jobs in March, and we’ve seen a lot of store closures and bankruptcies this year. Have the job losses been concentrated in certain segments of retail? What will it take for this sector to stop hemorrhaging jobs?

Conway: Retail is in a cycle of reinvention. During the first quarter of 2019, we saw the announced closing of approximately 4,300 stores, and that is showing up in the March numbers. According to Business Insider, the top brands that are closing stores are as follows: Payless ShoeSource (2,500 stores); Gymboree (805 stores); Shopko (251 stores); Gap (230 stores); and  Sears (70 stores).

What isn’t in these numbers are the retail e-commerce jobs being created, but classified in the wholesale trade and transportation categories. And some of the professional services jobs are logistics-related.

The government and job-tracking data sources need to refresh how they categorize employment. Not all retail is just sales, checkout and other clerical jobs. It’s not all bad news. The ADP data shows approximately 9,000 jobs in wholesale trade and professional services that are retail e-commerce fulfillment and logistics-related.

The data source that best tracks this is the LinkedIn Workforce Report that segments all professionals with LinkedIn accounts into approximately 50,000 job categories and is also able to do skills-gap analyses. When you look at this activity, there are logistics, e-commerce fulfillment and experiential retail jobs being created and in strong demand.

REBO: The manufacturing sector lost 6,000 jobs in March, the first decline in factory payrolls since July 2017, according to Reuters. Employment at motor vehicle assembly plants fell by 6,300 jobs last month. What’s your near-term outlook for the manufacturing sector?

Conway: The news in manufacturing is best understood by looking at company earnings reports. Auto sales are still tracking near 17 million units annually, and consumers are buying autos. Consumers are shifting buying behavior around based to some degree on tariffs and manufacturers.

German brands making cars in the U.S. — such as BMW in South Carolina and Mercedes-Benz in Alabama — are doing well. Domestic brands like Ford and GM are slowing globally due to currency challenges and tariffs in which their most desirable models are made abroad and not in the United States.

The same is true for heavy equipment and appliance manufacturers such as Caterpillar. Input commodities like steel are rising and hitting margins, causing these manufacturers to slow down. You can’t generalize on manufacturing any more than you can on healthcare.

The two biggest events on the horizon that will impact manufacturing are:

(1) the ratification of the United States-Mexico-Canada Agreement. If it fails, the auto industry will contract and slip into recession;

(2) the China trade deal. If one gets done, the global slowing ends and China will be back purchasing equipment form Caterpillar and U.S.-manufactured agricultural products.

Don’t count manufacturing out. The consumer is still confident and is purchasing autos, consumer goods, furniture and appliances. You have to look at who is manufacturing what and where to forecast the winners and the losers.

REBO: The labor force participation rate, at 63 percent, has shown little movement over the past 12 months, according to the BLS. Some economists have expressed concern that our labor participation rate remains stubbornly low. Statistically speaking, is it low from a historical perspective, and if so, what’s the reason the rate hasn’t ticked up more during this lengthy period of economic expansion (102 consecutive months of job growth)?

Conway: The labor participation rate is historically low from a peak of just above 68 percent before the financial crisis. It is low for a couple of reasons that also speak to our job growth challenges.

First, we have an aging demographic of baby boomers who are retiring and opting to take Social Security and retirement benefits earlier due to the lack of demand for their age-cohort and skill set. Businesses want younger, more IT-skilled laborers and are increasingly utilizing artificial intelligence (AI) to replace traditional work done by baby boomers. For example, the financial services industry is utilizing smartphone technology to replace branch banks and a variety of financial services work.

Second, traditional industries like housing and manufacturing are more automated or just not as active as they were in prior up cycles. Millennials have been slower to form households and buy homes, so we are only building 75 to 80 percent the volume of houses that we have traditionally seen at this stage in a cycle.

Uber, Lyft and the coming autonomous vehicles are suppressing job growth, auto sales and services like taxi driving and valet parking. As businesses struggle with rising labor costs, providing healthcare, sustaining retirement benefits and rising real estate occupancy costs, they are turning to technology, automation and AI to do the work. That is impacting the labor participation rate as much as the aging baby boomer demographic.

We will see the labor participation rate fall further toward, or below, 60 percent in the next five to 10 years before we see it rise again above a 62 to 64 percent range again.

And finally, there is just an increasing skills gap in which more workers over the age of 50 are being pushed out. Whether it is the advancement of machine learning, AI, robotics, or autonomous transportation, technology is replacing physical labor. That trend will keep the labor participation rate suppressed.

Editor’s Note: The CCIM (certified commercial investment member) designation is conferred upon commercial real estate leaders who have a proven record of success in the field and have demonstrated a mastery of financial, market and investment analysis. CCIM designees come from a variety of professional backgrounds including brokerage, banking, property management, law, and accounting.

— Matt Valley

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