What a difference a month makes when it comes to U.S. job growth and the near-term economic outlook.
After the Bureau of Labor Statistics (BLS) released a disappointing nonfarm payroll employment report for May, showing a net gain of only 38,000 jobs — a figure that was later revised downward to 11,000 — June rebounded in a big way. Employers added 287,000 net new payroll jobs in June, blowing past the 180,000 jobs forecasted by Bloomberg based on its survey of economists.
In a research note titled “Employment Whiplash,” Robert Bach, director of research for the Americas at real estate services firm Newmark Grubb Knight Frank, wrote that both the May and June job growth data are “outliers” in his view.
Noise in the Numbers
Bach pointed out that a strike by Verizon workers subtracted about 35,000 jobs from the information sector in May, but when that crisis passed those jobs were subsequently added to the BLS report for June. Bach believes those events exaggerated the volatility over the past two months.
“The three-month average of 147,000 is a better indication of the underlying strength of the labor market. Although growth declined in the first half of 2016, it remains strong enough to take up some of the remaining slack in the labor force and absorb new entrants,” wrote Bach.
While that three-month moving average is well below the cyclical peak of 282,000 in December, it is consistent with the late stages of a long expansion cycle, added Bach.
Ryan Severino, senior economist and director of research at Reis, which tracks the performance of several property sectors nationally, disagreed that the job growth data for June was an outlier.
“May’s figure was clearly an aberration, even when we account for Verizon. But June being strong wasn’t that much of a surprise. The economy created 233,000 jobs in February and as recently as the fourth quarter was creating jobs at a pace close to 300,000 per month,” said Severino.
The U.S. economy is in the seventh year of expansion and near full employment, Severino emphasized. “If anything, the fact that we are creating this many jobs this far into an expansion shows how strong and durable the labor market recovery has been. Barring some sort of concerted government program, which I certainly don’t anticipate, I’d expect a bit of slowing in job creation over time simply because we are so close to full employment.”
The national unemployment rate in June was 4.9 percent, up from 4.7 percent in May. However, the labor participation rate of 62.7 percent in June remains quite low by historical standards.
Overall, Severino described the June jobs report as encouraging. Coupled with other data points, the latest job growth figures “should clearly put to bed the notion that the economy is on the precipice of a recession.”
Income growth is accelerating, said Severino. “In the most recent report it was 2.6 percent on a year-over-year basis, which is being understated by people entering and leaving the workforce. The growth rate for matched individuals (people who were working last June and this June) is 3.6 percent. This indicates tightness in the labor market.”
Breaking Down the Data
Job growth in June was broad based. The education and health services sector reported a net gain of 59,000 jobs in June. The leisure and hospitality segment was also up 59,000. Meanwhile, the information sector added 44,000 jobs, boosted by the return of the 35,000 Verizon workers.
Professional and business services, a big generator of occupier demand for office space, gained 38,000 jobs. Even manufacturers, plagued by weak exports, the strong dollar and anemic global growth, added 14,000 jobs.
“The office market is seeing a moderate pullback in leasing activity, as occupiers become more cautious late in the cycle,” wrote Bach. “But continued moderate job growth, combined with low levels of new construction, suggests the office market has room to tighten further in the second half of the year.”
The second-quarter office data was an outlier, Severino believes. “Over time, net absorption continues to trend upward, and given all of the tailwinds I see no reason why that shouldn’t continue. However, this is a far weaker office market recovery than we have seen in the past, and inconsistency coupled with weakness makes people jittery in a way that we wouldn’t see if the office market recovery were stronger.”
Stunning Vote Across the Pond
The data for the June jobs report was collected before the June 23 vote on “Brexit,” the historic referendum resulting in Britain choosing to exit the European Union. The jury is still out on whether Brexit will have a near-term impact on hiring among U.S. companies, wrote Bach. His take is that it will “probably not” have an impact.
Severino agreed. “We are a pretty insular economy in the United States. We aren’t that exposed to the rest of the world, even China. Unless a company has specific ties to the United Kingdom, Brexit is not likely to be a huge factor in hiring decisions.”
— Matt Valley