Full Impact of Extremely Low Unemployment Rate Yet to Be Felt, Economists Say

by Camren Skelton

WASHINGTON, D.C. — The U.S. economy added fewer jobs than anticipated in April, but the unemployment rate reached its lowest point in 17 years, according to the latest nonfarm payroll employment report released by the Bureau of Labor Statistics last Friday.

Total employment rose by 164,000 in April, slightly lower than economists’ predictions, but better than a comparatively lukewarm March. But the biggest takeaway from the latest figures was the jobless rate, which fell to 3.9 percent in April after sitting at 4.1 percent for six consecutive months.

To dissect the latest jobs figures and some of the underlying trends, REBusinessOnline reached out to three real estate economists: Ryan Severino, chief economist of JLL; Ken McCarthy, principal economist and head of applied research for the U.S. at Cushman & Wakefield; and Steve Hovland, CEO of Hovland Real Estate Consulting. What follows are their edited responses.

REBusinessOnline: Which headline number in the April jobs report released Friday, May 4 by the U.S. Bureau of Labor Statistics is more significant in your view — the 164,000 increase in non-farm payroll employment or the dip in the unemployment rate to 3.9 percent, the lowest in 17 years? Please explain.

Ryan Severino: The unemployment rate. All other things equal, the lower it gets, the greater the probability that wage growth accelerates.

Ken McCarthy, Cushman & Wakefield

Ken McCarthy: I would have to say the unemployment rate. Job growth was largely as expected and continues the trend of recent months. But the drop in the unemployment rate to a nearly two-decade low has potential implications for wage growth, inflation, Federal Reserve policy and interest rates. If low unemployment leads to faster wage growth, it might prompt a faster increase in interest rates and a more aggressive policy by the Federal Reserve.

Steve Hovland: The unemployment rate is more significant since it is uncharted territory. Unemployment has been below the 5 percent threshold since September 2016, and the needle on wage growth has barely moved. With the rate below 4 percent, we could potentially begin to see more pressure on wages, though the current report didn’t provide any evidence of that happening. It could take a few months of sub-4 percent unemployment to see the wage growth the Federal Open Market Committee (FOMC) is seeking.

REBO: Job gains have averaged roughly 200,000 year-to-date and 191,000 over the past 12 months, following the latest revisions, according to the BLS. Can you put that figure into perspective for us? Is that three-month average an indicator of strong employment growth, moderate growth or something else?

Ryan Severino, JLL

Severino: Job growth is slowing over time. Jobs per month peaked in 2014 and has been declining ever since. The strong reading from February, 324,000 net new jobs, looks like an outlier versus the other three months, which show a continued downward trend. This makes sense — as the labor market tightens, labor is becoming harder to find.

McCarthy: I would characterize any sustained job growth at 200,000 or more per month, or 2.4 million per year, as strong. Over the past several decades, employment growth during expansionary periods has averaged 2 million per year, so a year with 2.4 million jobs would have to be considered strong.

Steve Hovland, Hovland Real Estate Consulting

Hovland: I would characterize the current economic expansion as moderate on the whole. Over the past 91 consecutive months that the U.S. has added jobs, average monthly gains have been 198,000 positions, relatively on par with the three-month and 12-month average. With that in mind, the employment market appears to be healthy, but gains are moderate.

REBO: Were there any particular employment sectors that jumped out to you for one reason or another in the latest data?

Severino: Education and healthcare continue to create jobs, but these tend to be low-wage, low-productivity jobs.

McCarthy: One of the surprising trends has been the growth in retail employment. This year the retail sector has added 66,000 jobs. Last year this sector shed 35,000 jobs in the first four months of the year. With retailers closing stores, the increase in employment is a surprise. Construction rebounded after a decline in March and remains one of the stronger sectors in the U.S. economy.

Hovland: Other than manufacturing, the change in temporary employees in the professional and business services sector is the biggest takeaway from the current jobs report. Although monthly figures can be volatile, the year-over-year change in temporary employees has steadily trended higher, which could be an indicator of future gains.

REBO: The BLS report points out that employment in the manufacturing sector rose 24,000 in April and 245,000 over the past year. Most of the gains have been in durable goods industries. What is the big takeaway on the manufacturing front over the past year in your view?

Severino: The manufacturing industry can continue to grow and create jobs, but it is not the engine of job growth that it once was.

McCarthy: The surge in manufacturing over the past couple of years has been surprising. But even with the growth, this sector’s share of total employment remains stable at about 8.5 percent. Manufacturing jobs tend to be higher paying than many other sectors, so job growth here will boost income more rapidly.

Hovland: An increase in durable goods manufacturing is a welcome sign for the economy. Big-ticket items, such as appliances, fall into the durable goods category, and are indicative of a strong housing market. When people are not confident about their employment situation, or they’re barely making ends meet, they’re unlikely to purchase these items. According to the U.S. Census, furniture and electronics have posted healthy year-over-year gains.

REBO: With the labor market clearly tightening, are we likely to see a significant jump in wages and inflationary pressures, and what ripple effect would that have on the economy?

Severino: Both should continue to trend upward as the labor market continues to tighten. We likely won’t see upward movements that we have in the past, but that’s not unexpected given the economy of today. Stronger wage growth and faster inflation should continue to put upward pressure on interest rates, which ultimately slows economic growth. There’s a very strong empirical relationship between higher interest rates and slower economic growth.

McCarthy: One would think that tighter labor markets would mean faster wage growth, but it hasn’t happened so far. The last time the unemployment rate was below 4.5 percent in 2006 and 2007, wage growth was running at 3.5 percent or so, but today with a much lower unemployment, rate wage growth is sitting at about 2.5 percent. There seems to be a disconnect between wages and unemployment right now.

As for inflation, that depends on wage growth and productivity growth. We saw last week that worker productivity increased 1.3 percent from a year ago, which offsets some of that wage increase. I am not that worried about inflation increasing sharply in the near term, at least not “core inflation” (excluding food and energy). With oil prices up, we may see a spike in inflation for reasons that have nothing to do with labor markets.

Hovland: We’re more likely to see an increase in wages than at any time during the current expansion. The real issue is whether or not employers will be forced to lift wages before the next recession, when the labor market slackens again. I think we’re going to see higher wage growth, but it’s unlikely to jump much higher than 3.5 percent before we see a new downturn.

REBO: Against the current economic backdrop, which of the major commercial real estate property sectors (office, industrial, retail, hotel and multifamily) are poised to benefit the most and why?

Severino: Industrial. Demand for space remains strong, even as construction has risen. A tighter labor market with more jobs and stronger wage growth will mean more consumer spending and demand for space. That should keep vacancy rates low, rents high, cap rates low and prices high.

McCarthy: Strong employment growth, rising incomes and structural shifts in the economy are likely to boost demand for office, industrial and multifamily real estate. Job growth is positively correlated with occupancy and should lead to greater demand for office space. Rising income, which is a result of both rising wages and rising employment, will lead to more demand for apartments. And finally, the continuing rapid growth of online purchasing will boost demand for industrial space.

Hovland: Industrial still looks like a great sector for a number of reasons. Online retailers continue to rise in significance, and are taking up large distribution centers and smaller buildings within metro areas to enable rapid delivery. On the manufacturing front, support for oil extraction and the production of durable goods benefits the sector.

— Compiled by Camren Skelton and Matt Valley

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