Economists: Job Growth Train Rolls On, But Wage Issues Persist
The U.S. economy not only remains on a positive trajectory, but it is also experiencing accelerated job growth in industries such as construction, transportation and warehousing, as well as professional services, says Ryan Tharp, director of research at Houston-based Transwestern.
“There is still significant runway left for the U.S. economy,” he says, pointing out that the economic data suggests positive and robust growth for the next 12 to 18 months. At this stage of the economic expansion, the office, industrial, retail, healthcare and multifamily markets remain quite healthy across most of the country, adds Tharp.
Tharp’s comments follow the release of the latest nonfarm payroll employment data from the Bureau of Labor Statistics (BLS), which shows the U.S. economy added 157,000 jobs in July with hiring broad-based. While that figure fell shy of economists’ prediction of 190,000 jobs, July marks the 94th consecutive month of employment gains.
Spencer Levy, head of research for the Americas and senior economic advisor for Los Angeles-based CBRE, echoes Tharp’s sentiment.
“The economy is moving forward better and more diversely than expected with the continued strength in healthcare and business services now enhanced by construction, manufacturing and yes, retail,” says Spencer. “Despite the Toys ‘R’ Us bankruptcy, the retail sector still added 7,000 jobs in July and 200,000 year-over-year.”
Levy adds that while strong tenant demand bodes well for the five major commercial real estate property types in the near term, developers may put the brakes on new construction shortly.
“While the jobs report did not show overall strong wage increases, that is not the case in commercial real estate construction, where costs are going up significantly for labor for both new-build projects and tenant fit-outs,” says Levy.
Wage Concerns Linger
Economists do acknowledge pockets of weakness in the labor market, however, despite the national unemployment rate dipping to 3.9 percent in July and the upward revisions to the job numbers for May and June. Total employment gains for those two months were 59,000 higher than previously reported.
Wage growth has held steady at 2.6 percent annually for the last two years, and the labor force participation rate is unchanged for the year at 62.9 percent.
In order to open more stores and/or expand their footprints, commercial real estate users need to be able to offer wages that will attract and retain talent for the long term. And employee turnover rates are rising. The BLS states that the total number of job separations — defined as quits, layoffs and terminations — stood at about 5.5 million in July, an increase of roughly 80,000 from June and 200,000 from May.
But in terms of the outlook for commercial real estate, the sheer volume of job growth has been sufficient enough to offset concerns over tepid wage growth. Job gains in industries that have an immediate impact on leasing activity were especially pronounced in July. Such sectors include leisure and hospitality (40,000 new jobs), manufacturing (37,000 new jobs) and construction (19,000 new jobs).
The Bright Side
Tharp of Transwestern points out that after losing nearly 400,000 workers between March and April, the American labor force is back on track for the summer, adding more than 700,000 participants in June and July. The ability of the labor market to regain its footing and push the overall unemployment rate back down is an encouraging sign, according to Tharp.
“The economic data shows that April’s [unemployment] rate of 3.9 percent and May’s rate of 3.8 percent were not anomalies,” he says. “As the labor market continues to tighten, we will begin to see wage pressures increase.”
Tharp adds that the labor force participation rate has increased by nearly 3 percentage points over the last decade. In addition, he says, hits to the labor force were to be expected given certain demographics, especially the rapidly growing number of retiring baby boomers.
“Nonparticipation due to retirement is a primary reason behind declines in overall labor force participation,” he says. “But we’ve had enough new workers joining to keep the participation rate steady. We will continue to lose a significant chunk of the labor force in the coming years as baby boomers retire, but many economists don’t believe it will have a significant long-term effect on the real estate industry.”
Levy of CBRE notes that the tight labor market — one in which there are more open jobs than unemployed persons — has a positive implication for the economy and the commercial real estate business in the form of favorable borrowing costs. In the absence of strong wage growth and higher consumer spending, the need to raise rates and curtail economic growth is reduced.
“The lack of wage inflation limits the pressure on the Fed to raise interest rates more quickly than currently expected,” he says. “This means the economy can grow longer in this cycle than most forecasters would expect, as it already has.”
The current U.S. inflation rate of 2.9 percent is at its highest mark in more than five years. But the firm lid on consumers’ purchasing power may result in a smaller or more delayed hike than expected. If that were to occur, real estate developers and investors would benefit in terms of financing for new construction and acquisitions.
The Dim Side
There’s no question that a soft labor market also poses some problems for the industry. To some degree, the contingent of workers who are “underemployed,” or are working jobs below their skill sets, has contributed to a low overall unemployment rate. Underemployment also discourages wage growth.
According to Levy, the American labor market also shows signs of underwhelming productivity, defined as output per hour worked.
“Dramatically low productivity here and in all established Western economies is the elephant in the corner of every economic room,” he says. “This problem needs to be solved, or employers won’t be able to pay higher wages. In that case, they will likely look to outsource and/or increase automation.”
Levy points to the American manufacturing sector, the beneficiary of the Trump administration’s protectionist trade policies and the recipient of 37,000 new jobs in July, as an example of a segment in which employers are working their way around paying higher wages. Automated labor is nothing new to the manufacturing world, but in Levy’s view it’s not the answer to diminished productivity.
Automation, which theoretically should increase material productivity and has done so in the past, hasn’t led to increased productivity in the current economic expansion, he says. “Kick-starting productivity through greater R&D and infrastructure spending, plus materially improved primary and secondary education, is our best path to sustainable wage gains.“
— Taylor Williams and Matt Valley