Researchers Discuss Hiring Trends, Interest Rates and Tariffs After Tepid Jobs Report for March
WASHINGTON, D.C. — U.S. employers have added to their payrolls for 90 straight months, extending the longest continuous jobs expansion on record, according to The Wall Street Journal. Still, the latest employment report from the Bureau of Labor Statistics (BLS) fell far short of expectations. Total nonfarm payroll employment rose by 103,000 in March, while unemployment held steady at 4.1 percent, the BLS reported last Friday, April 6. Wall Street economists had expected an increase of about 185,000 jobs in March, reports Bloomberg.
REBusinessOnline reached out to three real estate researchers for their reaction to the latest jobs report, plus insights as to when this positive streak might end, the near-term outlook for interest rates, and the impact of tariffs on the employment market.
Q&A participants included 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 Steve Hovland, director of research for Irvine, Calif.-based HomeUnion Inc. What follows are their edited responses.
REBusinessOnline: Why do you think the total nonfarm payroll employment for March fell far short of expectations, and what should we read into this underwhelming figure? Did the headline number surprise you?
Ryan Severino: This just looks like a bit of payback after payroll gains were a bit inflated in March, rather than just purely an impact from the bad weather. I would not read anything into one month. The data are volatile and are often revised. The overall trend is still quite positive, even with revisions to January and February subtracting 50,000 jobs. Through the first quarter, monthly job gains averaged 202,000 net new jobs per month. This compares favorably to the 182,000 net new jobs per month gained for 2017.
Ken McCarthy: While the increase in employment was smaller than expected, it needs to be taken into context. The increase in employment in February was very strong, so some moderation was not unexpected, and the average gain for the first quarter was 202,000, which is stronger than the average in 2017 as a whole. It is very difficult to forecast the monthly change in payroll employment because a lot of factors such as weather can impact any given month.
Steve Hovland: The number was surprising. I think most of the country was hopeful that the tax cuts were going to supercharge the economy after February’s impressive job growth. As it turns out, average monthly gains in the first quarter were approximately 25,000 jobs above last year’s rate. Essentially, growth in February was overinflated as much as March’s figure disappointed. The job market remains healthy, but a breakout year is likely to elude us this cycle.
REBO: Were there any employment sectors that stood out to you in March, or in the first quarter, which might be of particular interest to our commercial real estate audience?
Severino: Business and professional services gained a net 33,000 jobs in March, despite scarcity of qualified labor. Those gains are supporting demand, which is helping to offset increased construction activity in the office sector. Without those job gains, office vacancy would be rising faster than it currently is.
McCarthy: I like to look at employment in office-using industries (financial, information and professional and business services); industrial-related employment (manufacturing, wholesale, transportation and warehouse); and retail-related employment (including food and beverage). Employment growth in all three of these groups was stronger on a monthly average basis in the first quarter of 2018 than it was for the same time period last year. That bodes well for real estate demand.
Construction employment is also good to look at as it points to the supply side of the industry. Construction employment fell in March, but was up at a healthy pace in the first two months of the year. Although the economy has added a lot of construction jobs this cycle, the overall level of construction employment is still well below the peak of 2007, pointing to a shortage of construction workers.
Hovland: The manufacturing and mining industries showed impressive growth last month, up 12,000 and 8,000 jobs respectively, which will support the industrial sector. Many of the tools and machinery used in oil extraction are manufactured in the United States. Warehouse buildings are also seeing support from online retailers. Although the retail trade sector lost 4,400 jobs, the transportation and warehousing sector added 9,800 spots.
REBO: As previously mentioned, U.S. employers have added to payrolls for 90 straight months, extending the longest continuous jobs expansion on record. How many more months do you think we can extend this streak before it runs out of gas and what will be the biggest determining factors?
Severino: While I think we have at least 12 to 18 months for the economy to continue to grow, a streak like that is difficult to predict. It almost ended in September of last year due to the impact of the hurricane. The original figure before revisions for the month actually showed a contraction. But more important than the streak per se is the inflection point — where job growth starts to turn negative. And again, I don’t see that happening too soon.
McCarthy: If I could guess when the streak will end, I would probably be in a different line of work. Seriously though, this streak is one of those records that will probably never be broken, like Joe DiMaggio’s 56 game-hitting streak in baseball. If asked to guess, I would expect that it would end sometime in 2020. By then, we will be close to running out of workers.
Hovland: Unless the BLS changes how it tracks the hiring of census workers, we can potentially extend the streak to mid-2020. Every single census year has seen at least one month of job cuts dating back to World War II, and I don’t expect 2020 to be any different. In the summer of 2019, we’ll surpass the longest expansionary period since the Second World War, which I believe is plausible. I’m eyeing a recession in 2020, driven by higher interest rates and high sovereign debt.
REBO: What impact do you think the Tax Cuts and Jobs Act will have on the jobs market and our economy in general in the short and long term?
Severino: Assuming that the barriers-to-trade issue doesn’t worsen, the legislation should boost economic growth by up to 50 basis points this year. In the long run, that growth is unlikely to be sustained once it becomes part of the economic base. Stimulating the economy relatively late in the cycle risks stoking inflation, pushing interest rates higher (via stronger inflation and higher debt balances), and actually hastening the end of the expansion. The impact on jobs is likely to be even shorter lived.
The big issue facing the labor market is scarcity — there were 6.3 million jobs open as of January, a record high. The legislation does nothing to address this scarcity issue at a time when the labor market is more or less at full employment and competition for qualified workers is intensifying.
McCarthy: The impact of the tax act is occurring at the same time the global growth is coming in stronger than expected. These two developments are likely to stimulate the economy in the near term and probably keep the pace of job growth healthy. Put it this way, I would have anticipated a slowdown in employment growth before the tax act, but with the tax act I don’t think that will happen. Longer term, unless the economy accelerates dramatically, we are likely to see larger federal budget deficits leading to higher interest rates.
Hovland: During this expansion, it will lift hiring modestly and fuel some retail spending. However, the impact of the Tax Cuts and Jobs Act isn’t sufficient enough to bring the economy into growth of 3.5 percent or higher. Over the long term, it’s likely to be a drag on the economy as sovereign debt becomes a larger issue.
REBO: Our readers pay close attention to interest rates because commercial real estate is a highly capital-intensive business. Given the current state of the U.S. economy, where do you think the 10-year Treasury will stand at the end of 2018? It’s currently just shy of 2.8 percent.
Severino: It will likely end the year somewhere around 3 percent, but with risk to the upside. Despite negative headlines and policies that have roiled equity markets, the Treasury markets haven’t seen yields pull back much. That signals to me that short of some idiosyncratic event, rates are headed higher, even if inconsistently.
McCarthy: We do not see the 10-year rate rising much above 2 percent by the end of this year. The main reason for this expectation is the very low level of government bonds in other countries. We expect capital to gravitate to U.S. Treasuries and help keep long-term rates down.
Hovland: With the Fed on track to raise rates two more times this year, the baseline estimate would be in the low-3 percent range. However, volatile equity markets and a mature recovery should entice many investors to reposition their portfolios to include a larger share of safe investment vehicles, including U.S. bonds. We anticipate the 10-year Treasury to finish the year close to 3 percent.
REBO: President Trump recently slapped tariffs on $50 billion of imports from China. In retaliation, China put tariffs on $50 billion worth of U.S. exports to China. What effect can a trade war have on job creation, if any?
Severino: These tariffs will almost certainly kill jobs because they will harm more industries than they will protect.
McCarthy: Trade wars are not good for the economy. And if there are policies that raise the cost of goods here and threaten U.S. exports, then it will have a negative impact on job growth and the economy. It is not clear that this will happen, so we need to be careful about drawing conclusions yet.
Hovland: Overall, free trade is good for the economy. And more importantly, free trade prevents wars. President Trump is a “dealmaker” and tariffs are a way for the administration to gain negotiating power, which I suspect is happening. After this tit-for-tat over tariffs, I assume Chinese and American delegations will negotiate a trade agreement that will be more beneficial to America than what’s in place now. Over the long run, I don’t believe the announced tariffs will be nearly as high, and a balanced agreement with China will be good for American workers.
— Kristin Hiller and Matt Valley