Real Estate Economists: June Jobs Report is Strong, Despite Rise in Unemployment Rate
WASHINGTON, D.C. — Employers hired at a steady clip last month while beating expectations. The U.S. economy added 213,000 jobs in June, marking the 93rd consecutive month businesses added to payrolls, the Bureau of Labor Statistics said last Friday in its monthly report. Economists surveyed by Reuters had expected a monthly gain of 195,000 in total nonfarm payroll employment.
The unemployment rate inched up to 4 percent — the first increase in almost a year — but even that uptick reflected a healthy economy, according to industry experts. More than 600,000 people entered the workforce in June, increasing the unemployment rate, but signaling that previously discouraged Americans are confident in the tight labor market and are starting to hunt for jobs again.
Still, the U.S. economy faces potential headwinds. Late last week the U.S. and China began imposing levies on $34 billion of each other’s exports, and tariffs on an additional $16 billion in goods are looming, according to The Wall Street Journal.
U.S. President Donald Trump has threatened to raise the levies to include nearly all of China’s imports to the U.S. — approximately $505 billion last year. Trump wants China to cease alleged unfair trade practices it uses against the United States. He also wants to reduce the U.S-Chinese trade deficit. The U.S. trade deficit with China was about $375 billion in 2017. More specifically, U.S. exports to China totaled $130 billion, while imports from China were $506 billion.
On the heels of the latest jobs report, REBusinessOnline reached out to five real estate economists and researchers: Ken McCarthy, principal economist and applied research lead at Cushman & Wakefield; Spencer Levy, Americas head of research and senior economic advisor at CBRE; Ryan Severino, chief economist at JLL; Andrew Nelson, chief economist at Colliers International; and Matt Dolly, research director at Transwestern. What follows are their edited responses.
REBusinessOnline: The U.S. economy added 213,000 jobs in June, marking the 93rd consecutive month employers added to payrolls. How many more months do you think this streak will extend and what will be the biggest determining factors?
Ken McCarthy: The economy has certainly had an extraordinary run of job growth. It’s like Joe DiMaggio’s 56-game hitting streak, a Major League Baseball record that may never be broken. It’s difficult to predict month to month changes in employment, which can be impacted by so many variables, but it’s probably safe to say that, because of the tax cut and the generally high levels of consumer and business confidence, we are likely to see solid monthly job growth during the second half of 2018.
We could see a one-month decline in employment sometime in 2019 as the unemployment rate continues to decline and the availability of workers diminishes, but it’s difficult to predict when that might occur.
Spencer Levy: The key indicator last month was the labor force participation rate, which is the percentage of working-age people actually working. This figure ticked up, meaning that some people are re-entering the workforce. If this trend continues, that will lead to a longer runway for expansion. The rebound in the labor force participation rate also led to a modest uptick in the unemployment rate (from 3.8 percent to 4 percent). When the unemployment rate is so low, an increase is a good thing over the longer term as we maintain capacity to grow.
Despite the positive news on jobs, we did not see an increase in wage inflation. Over the past year, average hourly earnings have risen 2.7 percent, approximately the same as the past few years. This means the Fed will not be forced to raise interest rates more quickly either.
Andrew Nelson: There is nothing on the economic horizon to suggest an end to the positive job growth in the foreseeable future. Barring a significant, unanticipated event, economic growth should continue through next year at least. However, we should expect at least a moderate slowdown in late 2019 or 2020 as the temporary stimulus of the tax cuts and greater federal spending fade, and the cumulative impacts of rising inflation and interest rates slows corporate borrowing and consumer spending.
REBO: From a commercial real estate standpoint, what did you find most encouraging about the June jobs numbers and why?
McCarthy: For commercial real estate, the overall amount of jobs created is certainly a positive. The fact that job growth has accelerated to 215,000 per month this year compared with 182,000 in 2017 means that economic activity is increasing and that means more real estate is needed. In particular, the number of jobs in office-using industries such as financial services and professional services increased by an average of 58,000 per month in 2018, up from 47,000 in 2017. More office-using jobs generally means more demand for office space.
Levy: While down slightly last month, retail jobs are up on a year-over-year basis, and if you include food and beverage, up even more. The death of retail is the most overblown story in real estate. Retail is evolving as it has been for hundreds of years. Brick and mortar has an enormous competitive advantage — the physical place — that isn’t going away.
Nelson: The most positive aspect of the jobs report is just the fact that job growth is continuing at a healthy pace nine years into the economic expansion, even if slower than earlier in the cycle. Though economic growth per se is an important foundation for the property sector, space absorption is more closely associated with job growth than with economic growth or any other single factor. When firms add to their payrolls, they will generally need more space in which the new employees can work.
Beyond the general trends, there was good news for the office sector. The professional and business services segment has shown particular strength, and financial services were also robust. Manufacturing employment has been solid, which is positive for industrial space.
Dolly: The rise in construction jobs is the most encouraging aspect. It’s much needed in the commercial real estate industry due to continued new development in the industrial and multifamily property sectors, and redevelopment of office and retail.
REBO: Were there any employment sectors that stood out to you in June? If so, which ones and why?
McCarthy: I have already mentioned office-using employment as a strong plus. Another sector that stood out in the June report was the construction sector, which added 13,000 jobs and has added roughly 25,000 jobs per month this year. Since 2011, nearly 1.8 million construction jobs have been added to the economy. These construction jobs reflect the other side of the commercial real estate sector — the rising supply of office, industrial and multifamily space coming to market across the nation.
On a slightly negative note, retail employment fell by 22,000 jobs. After declining in 2017, the retail sector has seen employment growth in 2018, but it has been modest, reflecting the structural shifts that sector is undergoing.
Levy: Manufacturing jobs were up significantly in June and on a year-over-year basis. We don’t see this as a “blip,” but rather the beginning of a reversal of the longer-term trend of manufacturing’s decline. This is happening because of the rapid drop in the cost of automation, which makes it cheaper to “re-shore,” and it will only continue to get cheaper. Also, we are seeing a renaissance of local businesses formed (like microbreweries) in part as a reaction to the same forces of globalization and automation that displaced many traditional jobs. It’s a trend referred to as “local is the new global.”
Finally, international manufacturers are seeing benefits of bringing production here. In addition to the large car manufacturers in the southeastern United States, a large Taiwanese company, Foxconn, is about to build the largest industrial facility in country (20 million square feet) outside Milwaukee. These trends are occurring independent of any protectionist policies we see or expect from the federal government.
Severino: Retail continues to ping-pong. We hear the death knell for retail employment, only to see it bounce back. But in subsequent periods, like June, retail employment declines again. Retail employment will likely remain volatile until the structural factors impacting the sector fully play out.
Nelson: News was positive almost across the board. The conspicuous exception was retail, the only major sector to post job losses last month. This is part of a pattern. The retail sector has lost jobs in nine of the past 20 months as the sector continues to struggle after years of overbuilding and loss of market share to e-commerce. By contrast, the warehouse sector has been surging at the expense of retail, with job growth up 16.7 percent over the past two-and-a-half years compared with only 1.4 percent job growth in retail.
In addition to professional and business services and manufacturing, education and healthcare also had a great month, continuing a strong trend this year.
Dolly: It’s no surprise that healthcare sector — perhaps the strongest industry during the past two decades — continues to rise due to the increasing population of Baby Boomers needing care.
REBO: The United States is threatening to impose tariffs on more than $500 billion in Chinese imports. China has retaliated almost immediately via duties on U.S. shipments including soybeans and automobiles. What threat does this trade war pose to the U.S. economy, and the commercial real estate market in particular? Do you think a prolonged trade war could tamp down expectations for job growth?
McCarthy: The U.S. economy is in the midst of a strong spurt of economic growth driven by high confidence, tax cuts and a supportive global economic environment. Any changes that could negatively impact those supports, such as rising trade tensions, could reduce growth. Perhaps more than the impact on costs, the trade tensions that have emerged in recent months create uncertainty, which makes it difficult for businesses to plan, and that could also dampen activity.
Thus far, the impact has been small and the economy continues to perform well, as we saw with the employment data. But rising trade tensions, if sustained, could slow growth going forward. In addition, trade restrictions tend to lead to higher prices domestically and could boost inflation in the United States. Since the trade restrictions are focused on goods, there could also be a disproportionate impact on the industrial sector, where the movement of goods drives demand. Any policy that restricts the flow of goods could reduce demand for industrial space.
Severino: This really depends how far down the rabbit hole we go. The measures implemented thus far should have a minimal impact on both the economy and commercial real estate. But if the Trump administration goes forward with greater measures, such a move could certainly create a more pronounced drag on both the economy and commercial real estate, industrial in particular.
Nelson: There’s no doubt that elevated trade tensions carry significant downside risks to the economy, particularly if the relatively tame levels of tariffs announced to date were to escalate materially. However, the immediate hit to the economy so far is trivial. For example, Oxford Economics expects the first tranche of tariffs on Chinese goods to reduce GDP by only 0.1 percent. The greater risk, however, is the potential disruption to global supply chains if the tariffs were to rise and expand to other countries. The impact could then include greater inflation as business costs rise; reduced business spending and hiring as firms assess the new trade outlook; and stock market volatility as investors fear the hits to profits. However, it’s worth emphasizing that these are risks only at this point, and strength elsewhere in the economy has more than outweighed the downside.
REBO: What impact has the Tax Cuts and Jobs Act had on the U.S. economy in general — and commercial real estate in particular — up to this point? What impact do you think it will have over the next six months?
McCarthy: The biggest impact on the Tax Cuts and Jobs Act is reflected in the employment statistics we have seen this year. The fact that employment growth is accelerating in an economy with a 4 percent unemployment rate and in an expansion that is now more than nine years old is largely attributable to the increase in confidence and spending that the tax act has stimulated. This growth has a direct impact on demand for commercial real estate and will likely continue to do so over the next six months. All sectors of the commercial real estate sector benefit when economic growth is strong.
Levy: The tax cuts had an immediate boost to corporate profits and have increased both corporate and individual confidence. Longer term (next year), we expect to see a further boost through enhanced capital expenditures. That could push the date of the next recession — which some expect to occur in the next 18 months — out further. The risk factor of fiscal stimulus so late in the economic cycle is that this would be too stimulative, thereby increasing inflationary pressures and causing the Fed to increase interest rates more quickly than anticipated. The good news is that we haven’t seen material increases in the inflation of wages, so we may be able to grow longer without overstimulating the economy and causing the Fed to act.
Severino: It will likely boost economic growth during most of 2018, but I expect that its impact will fade as 2019 wears on. In the short turn, it is likely propping up the commercial real estate market a bit, but in the medium run the economy still faces structural challenges that the act did not address and that are not going away. We aren’t seriously addressing the shortage of qualified labor. Giving companies money to spend is great, but if we don’t have qualified workers for the jobs they create, it doesn’t do much good. Ultimately economic growth will slow and commercial real estate will be impacted.
Nelson: The U.S. economy is enjoying the twin stimulus of the tax cuts, or tax reform, as well as the increase in federal deficit spending. Despite a slow start to the year, with first-quarter GDP revised down to just 2 percent, economic growth for all of 2018 looks to be the strongest in several years.
Nonetheless, the commercial real estate sector has not benefited proportionately. Property sales and leasing transactions peaked three years ago and have been trending down ever since, corresponding to the slowdown in job growth. The notable exception is industrial real estate, which has thrived with the shift to online shopping, prompting a dramatic expansion and overhaul in how goods move from manufacturer to consumer.
Unless we see a significant rise in job growth — which seems unlikely — don’t expect the temporary pickup in economic growth to translate into meaningful space absorption.
Dolly: While wage growth remains somewhat disappointing, it appears that companies are hiring and continue to be optimistic, especially small businesses. While the industrial market remains robust no matter what the news is, office tenants are increasingly seeking spaces with expansion options, a good sign of a growing economy.