The U.S. economy added 261,000 new jobs in October, its highest monthly total of 2017, according to the latest report from the U.S. Bureau of Labor Statistics (BLS).
The revised numbers suggest that the U.S. economy has recovered well from hurricanes Harvey and Irma, as evidenced by strong growth in the construction and leisure and hospitality sectors. In addition, the overall unemployment rate dropped to 4.1 percent, down 70 basis points from 4.8 percent at the beginning of the year.
However, overall labor participation rate continues to dwindle, driven by a growing number of retirees and misalignments between employees’ skill sets and employers’ demands, according to economists. All of these forces — plus low inflation — point to sluggish wage growth, which has only increased by 2.4 percent during the 12-month period ending in November 2017.
REBusinessOnline contacted three economists to get their takes on what these factors mean for the overall jobs market on both individual and collective levels: Ryan Severino, JLL’s chief economist; Steve Hovland, HomeUnion’s director of research; and Ken McCarthy, Cushman & Wakefield’s principal economist.
Their edited responses are as follows:
ReBusinessOnline: Economists polled by MarketWatch expected the U.S. economy to generate a net gain of 325,000 jobs in October in what would have been the biggest increase in two years. In fact, the economy added 261,000 jobs in October. That said, the revisions in total non-farm payroll employment for August and September show total employment was 90,000 higher than previously reported. What’s your reaction to the headline number for October and the upward revisions for August and September?
Severino: The labor market weathered the impact from the hurricanes well, bouncing back faster than it did from previous natural disasters. October’s gain, plus the prior month’s revisions, show that once we filter out the noise, the underlying trend remains firm: Job gains per month are declining over time, but that’s because of labor scarcity.
Hovland: The overall additions are in line with expectations; it’s just a matter of in what month they were recorded. It was understood that the economy didn’t lose jobs during September, and that the original headline figure would be increased significantly. Nonetheless, the aggregate between the months (162,000, on average) shows continual, gradual improvement in the labor market and gives the Fed wide discretion with interest rate policy.
McCarthy: While the increase in payroll employment in October was smaller than generally expected, it was offset by the upward revisions to employment in both August and September. The best way to look at this is to take the last three months together. In August, September and October, employment increased by an average of 162,000 jobs per month. In the previous three months — May, June and July — employment grew by an average of 164,000 jobs per month. So the trend has really not changed; the economy continues to add jobs at a solid pace.
REBO: Nationally, the unemployment rate fell 10 basis points in October to 4.1 percent, but Marketwatch indicated the decline stemmed in part from a 765,000 plunge in the number of people in the labor force. The broader U6 jobless rate fell to 7.9 percent, the first time it’s been below 8 percent since 2006. As an economist, are you elated that the overall unemployment rate continues to decrease, or is that elation tempered by the fact that the number of people in the workforce is falling? What is causing the drop in the number of people in the labor force?
Ryan Severino, JLL
Severino: Continued job growth is my top concern. Without job growth there will be problems in the economy. I don’t read too much into the unemployment rates on a monthly basis — they can be useful in illustrating trends over time, but I don’t see a lot of value in dissecting them from one month to the next. As far as people coming and going in the labor force, I would never read too much into one month here as well. Big picture, there are two things that are occurring: First, some people are structurally unemployable (their skills do not match the demand in the labor force) so they are staying out of the workforce. Second, aging baby boomers are retiring and leaving the workforce at a pace of roughly 10,000 per day.
Hovland: A significant number of people retire every day. In fact, 10,000 baby boomers turn 65 daily, which leads to a sizeable amount of people removing themselves from the labor force. The participation rate has stabilized since March of 2015. Although volatile, the rate is 62.7 percent and above the post-recession trough of 62.4 percent. As Millennials begin to enter the workforce in greater numbers with skills aligned to the tech-based economy, I expect the participation rate will tick higher.
McCarthy: This is a very good question. The low unemployment rate is certainly a positive for the economy, but the fact that it coincided with a large drop in household employment is a bit disconcerting. Ideally we would want to see unemployment decline because the number of unemployed persons declined and the number of employed persons rose. The continuing decline in labor force participation has been a puzzle throughout this expansion and there are many possible explanations, including the aging and retirement of the baby boomer generation. It’s important not to put too much weight on one month’s data, however, especially in the household series where the sample size is smaller and the data tends to be more volatile.
REBO: We saw broad-based job growth in October, but what sector(s) stood out to you and why?
Severino: The construction sector. Wages grew 2.3 percent on a year-over-year basis. This was below the 2.4 percent overall increase. The fact that there is a notable dearth of competent construction employees — to the point that some companies are offering free training/classes and job offers to workers — and wages are still growing below average demonstrates how important productivity growth is to wage growth. There is poor productivity growth in the construction industry and this is reflected in the wages.
Hovland: The most sizeable gain was in the leisure and hospitality sector, where many establishments were closed during the survey period in September. After losing 102,000 jobs, the sector bounced back with 106,000 positions. Retail trade is the largest concern for the economy as internet sales continue to eat away at brick-and-mortar establishments. The retail model will continue to evolve into an omni-channel delivery system. Currently, online retailers appear to be well positioned to lead this evolution. Amazon’s acquisition of Whole Foods is one example of an online retailer flexing its cash-heavy muscle to move into traditional retailing space.
McCarthy: First, of course, the leisure and hospitality sector where employment plunged by 102,000 jobs in September and then increased by 106,000 in October. This is clearly a direct reflection of the impact of Hurricane Irma on Florida’s tourist sector. Next, I would point to manufacturing. Employment in manufacturing has increased by 75,000 jobs over the last three months, the best growth in four years. After a year of contraction, the manufacturing sector is growing again in the U.S. and that will boost economic activity in 2018.
REBO: The average hourly earnings for all employees on private nonfarm payrolls (at $26.53) changed little in October (down one cent), after rising by 12 cents in September. Over the past 12 months, average hourly earnings have increased by 63 cents, or 2.4 percent. True or false: Wage growth in this economic recovery has been quite slow. If true, what are the contributing factors and what is the solution?
Severino: The answer to this question depends on your definition of “slow.” Has wage growth been slow relative to past expansion cycles? Yes, but it is not slow when we think about what determines wage growth. Wage growth is largely determined by inflation and labor productivity growth. Both have been relatively tame during the current expansion and that is reflected in the wage data. Lately, productivity growth has been accelerating so that could portend faster wage growth next year. However, that will be a marginal improvement. There’s no reason we should expect 3.5 to 4 percent wage growth in the current economy.
Steve Hovland, HomeUnion
Hovland: Wage growth has been slow compared to previous economic expansionary periods, but some perspective needs to be introduced to this hot-button issue. The low-interest rate environment and weak job market during the initial stages of the recovery have resulted in anemic inflation. Employers have little impetus to lift wages other than for very specialized positions. Furthermore, the 2010 elections ushered in a wave of anti-union sentiment across the country, diminishing negotiating power from labor. The impact of that legislation continues to affect wage growth today, particularly for blue-collar workers.
McCarthy: Wage growth has been slow during this expansion. Although the decline in October is more a function of the mix of jobs — more leisure and hospitality jobs which tend to be lower-paying — the overall pace of wage growth has been sluggish. Part of the reason is the mix of jobs, with fewer high-paying jobs being created, perhaps because of a lack of qualified workers. Another reason may be low inflation. With inflation currently running in the 1.5-percent range, a 2.4 percent wage increase is still a real wage gain. In addition, it may also be due to the generational shift occurring in the work force as older workers retire and younger workers replace them since older workers tend to be more highly paid than younger ones. This could have an impact on average wages. I feel that the answer is most likely a combination of all these factors and others that we are not aware of. Overall, I expect everyone agrees that the economy would be even stronger if wages were rising more rapidly.
REBO: Looking at this employment report from a commercial real estate perspective, which property sector(s) stand to benefit most in the near term and why?
Severino: Industrial. More jobs and slightly higher incomes means more demand for goods and imports, irrespective of which channel through which they are purchased. Slowing job growth is weighing on the office sector, new supply is offsetting the strong demographics in the apartment sector and retail is still a game of haves and have-nots. But industrial — across building sizes, ages and markets — continues to benefit from the ongoing expansion in the labor market.
Hovland: The October jobs report showed a job market giving us more of the same: slow, steady growth that shows a maturing economic recovery. The warehousing industry appears to be well positioned to take advantage of on-demand delivery, which will continue to play a bigger role in people’s lives. The single biggest takeaway for the commercial real estate industry is a return to the strict due diligence that immediately followed the recession. Fewer projects pencil out, particularly apartment and office development. The urban Class A apartment sector is oversupplied in many areas, whereas office space is unlikely to see a huge turnaround in absorption rates. Because interest rates are still low and we’re so deep into this recovery, investors need to focus on exit strategies and how to sell or refinance properties in seven to 10 years when exit cap rates will likely be higher than entry cap rates.
Ken McCarthy, Cushman & Wakefield
McCarthy: I would point to the continuing health of the office-using sectors. Employment in the three key office-using sectors — financial, professional business services and information — increased by 54,000 jobs in October and growth in these sectors has averaged more than 50,000 per month over the past six years. As a result, these industries now account for an all-time high of 21.8 percent of total employment. In addition, if we look at employment in all the various industries that make up the distribution sector, including warehouses, couriers and truck transportation, it is up 95,000 jobs or 2.7 percent from a year ago, that’s double the national pace of 1.4 percent. These trends point to strong growth in demand for the office and warehouse sectors.
REBO: We are nearing the finish line for 2017. How many non-farm payroll jobs are we on track to create this year and how does that compare with the expectations you set at the start of the year?
Severino: We should still end the year around 2 million, even if growth slows relative to trend. I thought we’d end the year just above 2 million so I still feel like we are on the same trajectory.
Hovland: We’re on track to add 2.2 million jobs for the calendar year, slightly below our expectation at the beginning of the year. Through October, we’ve added 1.7 million positions. Between revisions and gains of approximately 200,000 per month during November and December, it’s very possible for the economy to reach 2.2 million. Job gains should come in slightly below last year’s pace.
McCarthy: The economy is on track to create about 2 million jobs in 2017. That’s a slowdown from 2.2 million in 2016 and likely to be the slowest year since 2011. However, this is still a very healthy level of job growth. At the beginning of the year we were looking for slightly slower growth, something in the 1.7 million job range simply due to the continuing decline in unemployment. So the economy has definitely surprised on the upside this year.
— Compiled by Taylor Williams and Matt Valley