The national unemployment rate fell two-tenths of a percentage point to 3.7 percent in September, the lowest level since 1969. That’s the same year that Apollo 11’s lunar module, Eagle, carrying U.S. astronauts Buzz Aldrin and Neil Armstrong landed on the moon.
Employers added 134,000 jobs in September, according to the Bureau of Labor Statistics (BLS), well below economists’ expectations of 180,000. But the effects of Hurricane Florence that struck the Carolinas during the month, plus worker shortages in some industries, likely were factors, according to knowledgeable observers.
Despite the less-than-expected increase in September, job gains have averaged 190,000 per month over the last three months after revisions, reports the BLS.
To get a better perspective on what the latest jobs data means for commercial real estate, REBusinessonline.com reached out to two economists: Ken McCarthy, principal economist and head of applied research for the Americas at Cushman & Wakefield; and Ryan Severino, chief economist for JLL. What follows are their written responses to questions posed by REBusinessonline.com.
REBusinessOnline: Hurricane Florence affected parts of the East Coast during September. To what degree did the hurricane cause the monthly gains in nonfarm payroll employment to fall short of expectations?
Ken McCarthy: First, I would note that forecasting monthly employment changes is not easy, and being within 50,000 of the actual number is not bad. Although the BLS stated in the employment report that response rates were within normal ranges, suggesting little impact from the hurricane, there are a couple of telltale signs that suggest employment growth would have been higher without the storm.
Ken McCarthy, Cushman & Wakefield
Specifically, employment in the leisure and hospitality sector fell by 12,000 jobs in September. The last time employment in this sector fell was a year ago after the hurricanes that hit Houston and Florida. Prior to that you have to go back to 2012 to see a decline in this sector. In addition, retail employment fell by 20,000 jobs, also a little unusual this time of year. So it is probably reasonable to estimate that some 30,000 to 40,000 jobs were temporarily impacted by the storm.
Ryan Severino: It appears thus far that the hurricane had a minimal impact on the labor market. Evidence for this conclusion comes not only from the payrolls data, but also from the initial unemployment claims data. Although unemployment claims in the Carolinas increased because of the hurricane, they did so to a lesser extent than many had anticipated. The weakness in the data could just be the random month-to-month fluctuation that occurs in the labor market, though September’s data tends to get initially underreported and then subsequently revised upward.
REBO: In light of the hurricane, how significant do you expect next month’s revisions for September to be?
McCarthy: Revisions are notoriously difficult to estimate, and any suggestion that I have would be a guess at best. There are many factors other than weather that impact employment in any given month.
Severino: Probably not much because of the hurricane specifically, but September is notorious for initially underreporting job gains and then later revising the figure upward. Disentangling the exact causes of any revisions could prove difficult.
REBO: The change in total nonfarm payroll employment for July was revised upward from 147,000 to 165,000, and the change for August was boosted from 201,000 to 270,000. With these revisions, employment gains in July and August combined were 87,000 more than previously reported by the BLS. Were you surprised by the strength of those revisions? Please explain.
McCarthy: The revision for the month of July was well within normal experience. The revision for August was a bit larger than we usually see, but it is certainly well within the statistical parameters of the sample. It’s sometimes better to look at growth over longer periods than to just look at the monthly changes. Over the last six months payroll employment has increased an average of 203,000 per month. These numbers are consistent with that pace of job growth.
Severino: Not especially. The economy has been running hot due primarily to fiscal stimulus, and we anticipated that job growth would rebound in 2018 accordingly. With the strongest economic growth of the year likely coming in the second and third quarters, the jobs data feels about right.
REBO: Healthcare employment rose by 26,000 in September. Hospitals added 12,000 jobs, and employment in ambulatory health care services continued to trend up (+10,000). Over the year, healthcare employment has increased by 302,000. How do you explain that growth given that 2018 has been a record year for mergers and consolidations in the healthcare space?
McCarthy: Healthcare employment in the United States has been rising steadily for decades, so these increases are right in line with long-term trends. While there has been consolidation within the industry, the main driver of demand is demographics. With an aging population, it is no surprise that employment in this sector would continue to increase.
Over time, one trend that we continue to see is the drive to move the delivery of healthcare services out of the hospital. In 1990, hospitals represented 42.8 percent of total healthcare employment. Today that number is 32.3 percent, while employment in outpatient services has increased its share from 3.5 percent to 5.8 percent, and home healthcare has gone from 3.5 percent to 9.1 percent.
Severino: Demand for healthcare continues to trend upward for a slew of reasons: demographic changes as society ages, Americans generally becoming less healthy over time (such as increasing rates of obesity), greater access to healthcare via the Affordable Care Act and the desire of many of the elderly to age in place and not move to a seniors housing facility. Healthcare will continue to be a growing industry in the United States, irrespective of consolidation.
Ryan Severino, JLL
REBO: Construction employment continued to trend up in September (+23,000). The industry has added 315,000 jobs over the past 12 months. Can you put into perspective for our readers whether the gains in the construction sector over the past year have been modest or significant, and what your outlook is for this sector in the near term?
McCarthy: The construction sector is experiencing solid growth in employment as the economy continues to grow and the demand for all kinds of real estate continues to increase. The current pace of growth is healthy, but certainly not unprecedented. One reason for this is the relatively modest pace of activity in residential construction.
For example, at the height of the housing boom in early 2005, construction employment was increasing by more than 500,000 jobs per year. One of the challenges in the construction sector is a shortage of qualified workers. This is a complaint that we hear frequently in the real estate sector.
Severino: I would classify the gains as significant. While the growth rate was higher earlier in the expansion and in previous expansions, the fact that the labor market is still generating this many construction jobs more than nine years into an economic expansion, given the dearth of qualified construction workers, is a notable achievement. The lack of qualified construction workers has been well documented at this point, so the continued gains are noteworthy.
REBO: The 10-year Treasury yield, which began the year at 2.46 percent, now stands at approximately 3.2 percent. What impact has this rise in the 10-year yield had on commercial real estate lending activity up to this point? What will be the impact in the near term?
McCarthy: So far, there has been very little impact in lending from the rise in interest rates. Most lenders and borrowers had expected that rates would rise this year and there is ample debt capital available. Near term we do not anticipate a significant shift in lending, but lenders may become more cautious if rates continue to rise.
Severino: Thus far the yield alone has not had that much of an impact. But if rates remain elevated, that could become a concern. My concern is that yields are now increasing because of economic developments that have already occurred, but economic growth should slow in the coming quarters. The Treasury market could be behind the curve here, meaning that economic developments that already occurred are only now pushing yields higher.
Those positive developments have likely already been baked into the commercial real estate market. But slowing economic growth in the coming quarters could start to have an impact on commercial real estate fundamentals and dampen the outlook for the sector. That could be a bad combination — rising yields and worsening fundamentals — which we are already starting to see.
REBO: Can you explain why the unemployment rate is still dropping? Historically, an expanding economy leads to more people entering the workforce, which tends to drive up the unemployment rate.
McCarthy: That’s a very good question and one that has puzzled economists to a certain extent. Why did the labor force participation rate fall from 66 percent early in this expansion to roughly 62 percent currently, and why hasn’t it increased since? It appears that an important contributing factor has been the retirement of workers who are part of the baby boom generation. These workers have offset the number of workers entering the labor force, and this trend has continued to hold down the unemployment rate.
Severino: The effect that you outline tends to be ephemeral. When one looks at the historical data, the unemployment rate generally (though inconsistently) keeps falling until economic growth slows and then rises as the economy heads into a recession. Since the prospect of a recession in the near term is low, it isn’t surprising to see the unemployment rate continuing to fall.
Strong demand for labor continues to outstrip labor supply, pushing down the unemployment rate. At some point the rate is likely to reach a floor, but it is difficult to tell if that point has been reached yet. Only more data points will provide us with the answer.
REBO: Based on the latest jobs data from the Bureau of Labor Statistics, which property sector(s) are you most bullish on at this point and why?
McCarthy: We need to look at trends and drivers to think about where there is likely to be growth. The tech sector has been an important driver of growth throughout this cycle, and we expect that to continue going forward. This would point to continuing growth in demand for office space.
In addition, the continuing expansion in e-commerce points to strong growth in the industrial sector. Finally, the multifamily sector has strong demographic drivers that remain positive.
Severino: Industrial continues to benefit from continued job and wage growth, high consumer confidence and e-commerce growth that is outstripping overall retail sales growth. It’s difficult not to be bullish on industrial, especially when the vacancy rates for the other major property types — office, apartment and retail — are already rising.
— Matt Valley