Was the unexpectedly weak February jobs report a blip or an inflection point? Most economists say it’s way too soon to sound the alarm bell, but they’re closely monitoring trend lines.
U.S. employers added 20,000 workers in February, according to the Bureau of Labor Statistics (BLS), far below the 180,000 projected by economists and a stark contrast to January when businesses added 311,000 jobs. Meanwhile, the national unemployment rate dropped two-tenths of a percentage point to 3.8 percent, one of the lowest levels in the past 50 years.
Ryan Severino, chief economist for JLL, describes the disappointing headline number in the February jobs report as an “aberration,” and advises the commercial real estate community to avoid reading too much into one data point.
Ryan Severino
“Nothing in the broader labor market data suggests a slowdown of this magnitude. It likely represents a payback from exaggerated strength due to weather effects in January,” says Severino. “One data point in isolation means nothing, especially given the propensity of the numbers to be revised and the fact that the confidence interval for these estimates can be significant.”
Ken McCarthy, principal economist and senior managing director at Cushman & Wakefield, says that beyond the weather, another factor may have been the lingering effects of the partial government shutdown. More than 800,000 federal workers were affected by the 35-day shutdown that began Dec. 22, 2018.
“Some furloughed workers likely took second jobs in January and may have been double counted,” explains McCarthy. “Most importantly, changes in employment from month to month can be erratic due to sampling. This number will be revised two times. It’s never a good idea to jump to conclusions based on one month’s data.”
Michael Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, Indiana, says the reason for the rapid slowdown in job growth in February isn’t immediately clear.
“There have been other bad months in this recovery, so this could just be one of those random bad months. It could be linked to the very rapid job growth in January, which was a very strong 311,000,” says Hicks.
More broadly, Hicks says the February jobs report is part of a growing body of evidence that points to a slowing economy. He believes that slowdown will likely help convince the Federal Reserve to keep its benchmark federal funds rate at 2.5 percent in the short term.
Employment in construction declined by 31,000 in February, partially offsetting an increase of 53,000 in January, according to the BLS. In February, employment fell by 13,000 in heavy and civil engineering construction. Over the past year, the construction sector as a whole has added 223,000 jobs. “Big losses in construction and tiny factory job growth indicate more than just a blip in the numbers, but it’s too early to make any confident predictions,” says Hicks.
Office Sector Hits Its Stride
Employment in the professional and business services segment rose 42,000 in February, in line with its average monthly gain over the prior 12 months. Severino says it would be an exaggeration to say the office sector is hitting it out of the park from a performance standpoint.
“Certainly the continued gains from business and professional services support demand for office space. But during a period when space per worker continues to decline, each incremental office-using job means less to net absorption than jobs in previous periods meant,” explains Severino. “I think we need to keep things in perspective. Relative to prior cycles, the recovery and expansion in the office sector looks modest even almost ten years into an economic expansion.”
Ken McCarthy, Cushman & Wakefield
McCarthy says office-using industries showed greater improvement than most others in February and have been important contributors to growth throughout this cycle. “This sector was a bit softer than average in January, but it’s probably best to look at several months of data together,” he says.
Manufacturing Shows Its Mettle
Manufacturing employment changed little in February — up 4,000 — after increasing by an average of 22,000 per month over the prior 12 months. Still, that’s the longest run of gains in that job sector since the mid-1990s, according to The Wall Street Journal. Has the sustained job growth in the manufacturing sector defied expectations?
“No,” says Severino in a word. “Some of this is a cyclical recovery from a bad recession that hit manufacturing — among other industries — quite hard. Some of the jobs lost during the recession were bound to re-emerge.”
Moreover, the gap in labor costs between the U.S. and other manufacturing centers is not as daunting as it used to be. With the rise of technology such as artificial intelligence, over time labor costs will cease to be the primary determinant for some manufacturers, according to Severino.
“While technology has certainly destroyed its share of jobs over the last few decades, the switch toward more technology-intensive manufacturing has been a boon in the U.S. The numbers remain modest, but any gains are positive,” he notes.
McCarthy emphasizes that the growth in manufacturing employment has been an important positive for the U.S. economy throughout the current expansion.
“The sector in the current cycle has probably been stronger than generally expected, adding a total of 1.4 million jobs. However, it is important to note that even with the steady growth, manufacturing employment is about 8.5 percent of total employment, a share that has not changed significantly during the expansion,” he explains.
Hicks says job growth in the manufacturing sector has been “robust” since the end of the Great Recession, but he points out that the sector hasn’t yet returned to 2007 employment levels. “Even during this recovery, the share of factory workers has been declining,” he says.
Trade War Headwinds
Since last July, theU.S. has slapped approximately $250 billion worth of tariffs on Chinese products. The U.S.-China trade war has roiled markets, and the countries are currently in intense negotiations.
Michael Hicks
More broadly, REBusinessOnlineasked the economists to what extent the U.S. steel and aluminum tariffs enacted in 2018 by the Trump administration have had on the U.S. economy.
“Research shows that the impact has been noticeable but not calamitous,” says Severino. “They have pushed up prices, effectively increased taxes on U.S. consumers and businesses, exacerbated the trade deficit and made the economy more inefficient by disrupting supply chain networks. The drag on economic growth is only roughly 10 to 20 basis points, but that still translates into billions of dollars.”
McCarthy believes the steel and aluminum tariffs imposed by the U.S. have had little impact on the U.S. economy. “Prices on some steel and aluminum products have increased, and some producer prices are seeing pressure, but consumer inflation overall remains subdued.”
Hicks says the trade war has hurt Indiana’s economy, “shifting our sale of products overseas away from agriculture and manufacturing toward services. Tariffs don’t affect the trade deficit, but they do shift what we buy and sell.”
— Matt Valley