By Matt Valley
The nascent recovery in the U.S. housing market helps explain why total nonfarm payroll employment surged by 236,000 in February, easily surpassing analysts’ expectations of 165,000 net new jobs, according to Ryan Severino, chief economist for New York- based Reis.
But the effects of sequestration — mandatory spending cuts by the federal government — could restrain hiring in the months ahead, he adds.
“Sequestration is likely to cause a slowdown in job growth during the next two quarters, which is unfortunate since it appears that in the absence of spending cuts roughly 200,000 job gains per month would be sustainable,” says Severino.
While the private sector added 246,000 jobs in February, government employment decreased by 10,000, according to the Bureau of Labor Statistics (BLS). That follows the loss of 21,000 government jobs in January.
With sequestration taking effect during the next few months, the loss of government jobs should continue, says Severino. Moreover, private government subcontractors will also experience job losses due to sequestration, he predicts.
While the biggest gains in payroll employment in February came from business and professional services (+73,000), the BLS reported that the U.S. economy added 48,000 construction jobs in February. Healthcare added another 39,000 jobs.
“Construction is clearly ramping up: 48,000 jobs in February, 25,000 in January and an average of 8,900 jobs during the past 12 months,” says Bob Bach, national director of market analytics for Newmark Grubb Knight Frank. “Homebuilding is back and prices are rising. It’s a huge support for consumer confidence and spending.”
Meanwhile, the retail and leisure/hospitality industries hired at a healthy clip in February, adding 23,700 and 24,000 jobs respectively, an early indication that the consumer can weather the tax increases that were passed in early 2013, according to Severino.
Congress allowed a two-year-old payroll tax cut to expire on Jan. 1. As a result, Social Security tax rates have risen from 4.2 percent to 6.2 percent. The end of the payroll tax holiday means a worker earning $50,000 will pay roughly $1,000 more in taxes this year.
The big picture
While the February jobs data exceeded expectations, it is no panacea for commercial real estate, emphasizes Severino. “For the office sector, a relatively healthy gain by the business and professional services sector is a step in the right direction, but only a step. There will need to be more consistent gains of this magnitude, or greater, from this sector of the economy before the pace of improvement in office fundamentals accelerates.”
This is especially true because many companies are trying to decrease their occupancy costs by shrinking the square footage of office space per employee. The national office vacancy rate stood at 17.1 percent at the end of 2012, according to Reis.
The job gains in February are more good news for the apartment market. “Demand for apartments remains so strong that any increase in employment is likely to translate into net absorption, especially as Gen Y continues to fare relatively well in the labor market,” says Severino. “Although new supply is ramping up a bit, empirical evidence shows that new units are being quickly absorbed as they come on line.”
The national apartment vacancy rate fell 20 basis points in the fourth quarter to 4.5 percent, according to Reis. Some 45,162 units were absorbed during the quarter.
For the industrial sector, strong performance by major corporations, many of which continue to hire, is translating into relatively robust demand for warehouse/distribution space, points out Severino.
“As the economy and labor market continue to improve, this will persist. However, for the flex/R&D subsector, we will need to see greater hiring on the part of smaller firms before demand rebounds in a more pronounced fashion.”
The good news for retail is that somewhat stronger wage growth in recent months is helping to offset the impact of higher taxes. “Nonetheless, this is the sector that has the farthest to rebound and there will need to be a far greater improvement in the labor market before demand returns to the retail sector.”
Back from the depths
Since the cyclical trough in employment in February 2010, payrolls have increased by 5.7 million, according to Severino. That means the U.S. economy has approximately three million jobs left to gain until it reaches the previous peak from January 2008.
Bach of Newmark Grubb Knight Franksays there is no disputing the fact that hiring trends in the past several months have been largely positive. He cites the following:
• Hiring accelerated in the fourth quarter of 2012, averaging 209,000 per month compared with 174,000 per month through the first nine months of last year. When the shouting from the fiscal cliff debate was at full volume, businesses increased their hiring.
• Although the economy expanded by an annualized rate of just 0.1 percent in the fourth quarter of 2012, the poor headline number was due to a plunge in defense spending and a decline in business inventories, which are subtracted from gross domestic product (GDP) calculations. Spending by consumers, businesses and homebuilders held up well.
• Businesses continued to spend in January. New orders for core capital goods — nondefense capital goods excluding aircraft — rose by 7.2 percent. This is the largest monthly gain since September 2004 and confirms that businesses are back in the game after a late summer lull.
• The Dow Jones Industrial Average hit a new closing high of 14,253.77 on Tuesday, March 5, passing its 2007 peak, and the broader S&P 500 is approaching a new high. Skeptics note that these data are not adjusted for inflation and that the performance is suspect because the Fed has its thumb on the market scales through its unprecedented easy money policies. Nevertheless, equity gains trigger a “wealth effect” in consumer spending that ripples through the economy. The gains are helping to cushion the payroll tax increase implemented at the beginning of the year.
• Leasing markets continue to tighten at a varied pace, depending on the location and quality of assets, while January property sales totaled $15.5 billion, slightly ahead of last year.
“These indicators are far from recessionary, mixed, weak, soft, muted or challenging,” says Bach. “But if top executives say it enough, maybe they will garner some admiration for their ability to perform in a ‘recessionary’ economic climate and some forbearance if they don’t meet Wall Street’s earnings expectations.”