Total nonfarm payroll employment rose by 200,000 in January, beating economists’ expectations, while unemployment held steady at 4.1 percent, the Bureau of Labor Statistics (BLS) said in a report released on Friday, Feb. 2.
Perhaps most importantly, average hourly earnings increased 2.9 percent, marking the biggest jump since the end of the Great Recession. While upward pressure on wages is good news for workers and the economy, experts caution that an increase in wages could lead to a hike in interest rates.
On the heels of the latest jobs report, REBusinessOnline reached out to three real estate researchers for their insights: Ryan Severino, chief economist for JLL who works out of the firm’s New York City office; Ken McCarthy, principal economist and applied research lead for the U.S. based in Cushman & Wakefield’s New York City office; and Don Ganguly, founder and CEO of Irvine, Calif.-based HomeUnion. What follows are their edited responses.
REBusinessOnline: Total nonfarm payroll employment rose by 200,000 in January. Wall Street economists had expected an increase of about 180,000, according to Bloomberg. What factor(s) led the labor market to outperform expectations in January?
Ryan Severino: I don’t view a difference of 20,000 jobs as substantial, but business enthusiasm is running at elevated levels, particularly the service sector. If I had to single out one industry that contributed to the upside surprise it would be retail, which swung from a contraction in December to a gain in January. Other industry categories were largely unchanged.
Ken McCarthy: One of the bigger upside surprises in the January report was in the goods-producing sectors of the economy, particularly construction employment, which increased a seasonally adjusted 36,000 jobs. With construction booming in many parts of the U.S., job growth in this sector has been an important contributor to the economy over the past several years. Perhaps an even larger surprise was a 15,000 increase in retail jobs, a sector that has been under pressure in recent years. In 2017, the economy shed nearly 30,000 retail jobs even as retail sales grew strongly.
Don Ganguly: The energy sector’s revival, and a buoyant global economy, influenced the manufacturing sector as well as the mining and logging sectors. In the West, warm-weather conditions boosted hiring in the construction industry. We saw a notable increase in demand for special labor contractors nationwide (a total of 26,300 new jobs), likely due to the need for relief work following a severe winter storm — known as a “bomb cyclone” — that hit the Northeast in early January.
REBO: Which job sectors surprised you to the upside or downside in January in terms of total change in employment?
Severino: Despite the continued improvements in technology and the increased digitization of the economy, the information sector in recent quarters has continued to slowly lose jobs, particularly in the telecommunications industry.
McCarthy: As previously mentioned, retail was a definite upside surprise. On the downside, the professional and business services sector grew at a slower than usual pace, adding only 23,000 jobs. One industry that stood out was accounting, which declined by 10,000 jobs. In fact, over the latest three months the accounting industry has lost 26,400 jobs. There may be some seasonal adjustment issues in the accounting data, as the industry appears to frequently lose large number of jobs at the end of the year.
Ganguly: Local governments have added 66,000 jobs since January 2017, while state government positions have continued to decline, with 11,000 jobs lost in December and a total of 39,000 jobs lost since January 2017. Additionally, the hospital sector gained 12,700 jobs.
REBO: Average hourly wages jumped 9 cents, or 0.3 percent, to $26.74. That pushed the yearly increase to 2.9 percent from 2.6 percent, marking the highest level since the end of the Great Recession in June 2009, according to MarketWatch. How significant is that uptick in wages over the past year, and what impact does that directly or indirectly have on commercial real estate? Do you think wage growth will accelerate in 2018?
Severino: The acceleration is somewhat significant because it reflects the ongoing tightening in the labor market. Employers increasingly have to offer higher wages to attract employees in the war for talent. Wage pressure should continue throughout 2018 because of continued labor scarcity. Historically, wage pressures eventually translate into higher inflation, even if slowly. Faster inflation is good for real estate because it functions as a somewhat imperfect inflation hedge, but in the long run higher inflation should mean higher interest rates, which could put a damper on the transaction market and the economy.
McCarthy: The wage gains are a double-edged sword for the economy and the commercial real estate sector. Higher wages increase income and consumer spending power, so they should lead to stronger growth and therefore more demand for real estate. However, wages are an important component of inflation, and higher inflation could lead to higher interest rates, as we saw last Friday when the bond market fell and interest rates rose following the employment report. Higher interest rates can have a negative impact on commercial real estate values. We do anticipate that the pace of wage growth will increase in 2018 as tight labor markets lead businesses to raise wages in order to attract workers.
Ganguly: In the past 12 months, more than 2 million jobs were created with an average hourly wage growth of 75 cents per hour, marking a nearly 2.9 percent increase. Average construction wages increased from $28.51 in January 2017 to $29.33 in January 2018. The construction sector added 36,000 jobs in January 2018 and 226,000 jobs in the past 12 months.
Recent natural disasters have impacted both residential and commercial real estate. For example, rebuilding in the wake of the wildfires and storms that ravaged California last month will spur additional wage growth in the construction sector. Subsequently, demand for new rental properties will remain strong in California and throughout much of the U.S. An increase in the minimum hourly wage in 18 states and a few cities in 2018 will also boost the average hourly wage overall.
REBO: What impact will the Tax Cuts and Jobs Act have on the U.S. labor market and economy in 2018 and beyond?
Severino: It might provide a short-tern boost relative to what would have occurred without the legislation being passed, but in the long run the legislation does not address the key issue in the labor market, which is labor scarcity. There are currently 6 million open but unfilled positions in the United States. Theoretically, companies creating more jobs will only exacerbate that issue and result in more open but unfilled jobs because the legislation does not address how we find more people to fill those open jobs.
McCarthy: We expect that as a result of the tax law, businesses will hire more workers and invest more in new equipment. The result should be continuing healthy job growth. However, with the unemployment rate at 4.1 percent, it will be difficult for businesses to hire qualified workers. Overall, we expect the Tax Cuts and Jobs Act to have a positive impact on 2018 economic growth.
Ganguly: Positive job growth over the past 88 months is the longest period of increase on record, substantive proof that the economy is strong. Higher after-tax earnings for workers nationwide, due to tax cuts, will result in higher wages for many workers, an increase in the U.S. GDP over the long term, and even more jobs. However, it’s worth noting that any accelerated increases in interest rates in 2018 may lead to a subsequent soft landing for the economy.
REBO: The 10-year Treasury yield currently stands at about 2.8 percent. Where do you think the 10-year Treasury yield will stand at the end of 2018, and what are the implications for commercial real estate?
Severino: There are reasons the ‘Interest Rate Forecasters Hall of Fame’ is completely vacant, but it seems reasonable to believe that the 10-year Treasury yield will end the year somewhere around 3 percent. However, the risk has shifted to the upside in recent months. If we end the year within a reasonable range of that level, the implications for real estate are not substantial. But continued increases will eventually slow the transaction market, pricing and economic growth.
McCarthy: We believe there are good reasons to expect that the 10-year Treasury yield will not rise much above today’s levels by year’s end. Long-term interest rates in the United States are still among the highest in the world and very attractive to foreign investors. This foreign demand is likely to offset the price declines we have seen in recent weeks. Overall, we believe the trend in long-term government bonds in the U.S. will be one of the most important factors to monitor in 2018. If rates spike, that could have a negative impact on commercial real estate values. But if they stay around current levels or rise only gradually, the real estate market will adjust.
Ganguly: We agree that the 10-Year Treasury yield should remain in the 3 percent range by the end of 2018. The Fed is expected to raise rates a few more times this year, and this increase will place upward pressure on interest rates. Rising rates will lead to lower yields on investment properties as debt servicing costs rise. Additionally, new loan origination volumes will likely decrease because of the rise in mortgage rates.
Investors will face challenges due to a lack of rental real estate inventory and lower mortgage deductions under President Trump’s sweeping tax reform. While wage growth my fuel further price increases for real estate investments, rising interest rates have the potential to dampen investment activity in the future. It will not be surprising if new homebuilders and some apartment developers start offering price discounts to buyers in order to reduce carrying costs on the unsold inventory in a rising interest rate environment.
— Camren Skelton and Matt Valley