U.S. stocks took a beating in the final month of 2018, with the S&P 500 falling 6.2 percent for the year and the Dow Jones Industrial Average down 5.6 percent. There was no Santa Claus rally on Wall Street down the stretch. Instead, the mood was more “bah humbug.” To add insult to injury, the year ended with a partial government shutdown amid a budget impasse in Washington, D.C.
Then came along a strong December jobs report, which provided a reassuring sign that the U.S. economy remains on solid footing. Total nonfarm payroll employment grew by 312,000 in December, boosting job gains for the year to approximately 2.6 million, according to the U.S. Bureau of Labor Statistics (BLS).
The results easily surpassed economists’ predictions of 180,000 to 185,000 in monthly job gains. What’s more, revised employment figures show that employment gains in October and November were 58,000 higher than previously reported.
The job gains were also broad-based. Leisure and hospitality employers added 55,000 jobs in December, followed by health care (50,000 jobs), professional and business services (43,000 jobs), construction (38,000 jobs), manufacturing (32,000 jobs), and retail (23,800 jobs).
While the unemployment rate rose two-tenths of a percentage point from November to December and now stands at 3.9 percent, economists say that’s largely due to an infusion of people entering the job market. Meanwhile, average hourly earnings have increased by 84 cents, or 3.2 percent, over the past year.
Is the exceedingly positive jobs report for December 2018 a harbinger of what’s to come in 2019, or will it prove to be an anomaly? REBusinessOnline asked three economists to share their views about the latest job figures and the state of the economy in general. The three Q&A participants included Michael Hicks, director for the center of business and economic research at Ball State University; Rebecca Rockey, economist and Americas head of forecasting for Cushman & Wakefield; and Ryan Severino, chief economist for JLL. What follows are their written responses to questions posed by REBusinessOnline.
REBusinessOnline: From a uniquely commercial real estate industry point of view, what in the report jumped out at you and why?
Ryan Severino: This report looked like a home run from a commercial real estate point of view. Aside from the headline figure, which was clearly positive, there were significant gains in a number of industries that are important to commercial real estate: professional and business services, construction, healthcare, retail, and leisure and hospitality all fared well during December. While I would caution against getting too excited about one month’s data, it was hard not to like the job gains in December.
Ryan Severino
Rebecca Rockey: This was a solid report overall, and general labor market conditions drive demand for all types of commercial space. In particular, both the overall pace of job and wage growth stand out, as well as some of the Household Survey details. For example, the unemployment rate ticked up slightly in December, with 276,000 more unemployed persons. But 142,000 of those 276,000 were people who actually quit or left their job. It takes a lot of confidence to be willing to do that, so some of these underlying details point to the continued view that the labor market will remain tight with plenty of opportunity.
I would note that the number of unemployed people fell on a year-over-year basis, though, with fewer job losses and an increase in the number of people willingly leaving their jobs.
This set of dynamics is good for workers and the economy, but it also creates challenges for firms of all sizes across most industries. Why? Because it also means that competition for labor is already fierce and can be expected to ratchet up further.
Michael Hicks:The entirety of the report was a surprise — the employment numbers, the growth in the labor force and the annual wage growth. The composition of the job growth was also good. So, overall it was as optimistic as any recent report at a much-needed time.
REBusinessOnline: With so much media attention focused on the partial government shutdown and the standoff between the Republicans and Democrats over the proposed border wall with Mexico, did the December jobs report get lost in the shuffle?
Severino:It could have, but the headline figure was so large, coupled with an outsized gain in wages, that it garnered enough attention. The publicly traded markets were paying attention. A more pedestrian result could have easily been overlooked, but the strong result, particularly set against a backdrop of market volatility and economic slowing, made headlines.
Rockey: I don’t think so. This was a dose of good news in an otherwise very uncertain environment, and I think most realize that.
Rebecca Rockey
Hicks:I don’t think so. Of course, the partial government shutdown is imposing economic costs and making lots of news, but equity markets surely noticed.
REBusinessOnline: We’ve seen a lot of volatility on Wall Street in recent months. Do you subscribe to the theory that the U.S. economy and the stock market are inextricably linked, or do different forces affect each one? How concerned should we be about the big daily swings we’ve seen in the Dow Jones Industrial Average or the NASDAQ of late?
Severino: While the market can reflect the economy, that is not the only factor that can impact the market. Moreover, the market has a propensity to overreact. Directionally, I don’t disagree with the market. The economy is slowing and headwinds are building, but the magnitude of the pullback seems too great to me. It would augur that a recession is coming in 2019, and I don’t think that is the case.
Hicks: Over the long run, equity markets set the value of traded companies. That determines wealth for the large share of households who ultimately own stocks. The short run volatility of stocks is very uncomfortable, but it’s not a strong indicator of economic conditions.
Rockey: The real economy can certainly be impacted by financial market conditions, but how and to what degree they are linked — and how that changes over time — is an incredibly complicated question. Nevertheless, the economy has experienced multiple stock market corrections this cycle, which is healthy. To the degree that this recent episode is an attempt to reprice risk, then it is also healthy. Persistent declines in stock prices can eventually impact confidence, wealth and ultimately consumer spending, translating into negative consequences for the real economy.
I tend to focus more on the hard economic data than daily financial data to get a read on the economy’s temperature. A month of continuous stock price declines is nothing to ignore, especially with what was also happening in the bond markets. The more important questions are why is this happening, and what are the risks and concerns that are leading to the repricing?
REBusinessOnline: According to the BLS, nonfarm payroll employment rose by 2.6 million for all of 2018, compared with a gain of 2.2 million in 2017. What property sector(s) do you think benefitted most from the job gains of the past year and why?
Severino:I will go in a surprising direction and say the apartment sector. During 2017, with job growth decelerating, vacancy in the apartment sector started rising at a meaningful rate with construction outpacing net absorption. In 2018, even though the vacancy rate still increased, it did so only slightly, at roughly half the pace of 2017. That occurred despite still-elevated construction levels because robust job growth propelled net absorption.
Rockey: The office sector benefitted the most because it is the sector most dependent on job creation in specific industries and occupations that tend to locate in office buildings.
Hicks: 2018 was an unusual year in that nearly all sectors expanded. Across the industrial sectors, everything but logging, computer and furniture manufacturing grew. In general, 2018 was a broad-based, economy-wide expansion.
REBusinessOnline: Did the creation of 2.6 million net new jobs in 2018 surprise you in any way, and what’s your prediction for job gains in 2019? Are there any wild cards that could alter the course of events?
Michael Hicks
Hicks: The Tax Cuts and Jobs Act certainly boosted employment growth and contributed to a strong 2018. The effects of the cuts were mostly in consumption, not investment, so they are less permanent. I think we’ll see a much slower 2019, but labor markets should still absorb nearly everyone looking for work.
Severino: I thought that job growth would rebound in 2018 because of the fiscal stimulus, but the magnitude of the gain was a bit greater than I would have expected. I think job growth in 2019 slows toward 2 million jobs, but there are any number of wild cards that could throw that figure off. This year is going to be a bumpy, but exciting ride.
Rockey: I can’t say I was terribly surprised by the 2.6 million figure. It was slightly higher than our estimate of 2.4 million, but certainly reasonable. That 2.6 million might change as November and December revisions take place over the coming months, too. Our forecast calls for another 1.5 to 2 million job gains in 2019. One thing I can say with more certainty is that there will be no shortage of wild cards. Whether it is the government shutdown, the path of interest rates, the global economy (China, the Eurozone, Brexit), trade policy, oil prices — the list of possibilities is a long one.
— Matt Valley