Rachel Goff
WASHINGTON, D.C. — The January nonfarm payroll report bolsters the argument that the U.S. economy is slowly improving, and the upward revisions to the 2012 data may encourage commercial real estate investors to take more risk, says Bob Bach, national director of market analytics for Newmark Grubb Knight Frank.
Employers added 157,000 net new jobs in January, including 166,000 in the private sector. What’s more, the nation added 335,000 more workers to the employment rolls in 2012 than initially reported.
“This report emboldens the risk takers moving into secondary markets and Class A-/B+ assets in primary markets, a trend that is already in place,” says Bach. “If investors believe the economy, specifically the labor market, is improving faster than previously thought, it means the outlook for net operating income at the property level also has improved.”
The job gains were healthy across many sectors including retail (+32,600); construction (+28,000); education and health services sector (+25,000); leisure and hospitality (+23,000); and manufacturing (+4,000). For all of 2012, the manufacturing sector added 149,000 jobs, or a monthly average of 12,417 jobs.
Two notable areas of contraction were in the transportation and warehousing sector (-14,000), and government (-9,000).
REBusinessOnline.com asked Bach and Victor Calanog, director of research for New York-based Reis, to offer their insights on GDP, the outlook for manufacturing and the relationship between consumer sentiment and consumer spending.
What do you make of the 0.1 percent contraction on annualized basis in fourth-quarter GDP in 2012? Was this an anomaly? How is it that we had more robust hiring in November and December than first reported and yet we had a contraction in GDP?
Bach: The weakness in GDP was focused on government spending, particularly defense spending, which fell at an annualized rate of 22.2 percent in the fourth quarter. That will be reversed in coming quarters, although the defense cuts mandated in the sequester remain a concern. Personal consumption expenditures (consumer spending) grew 2.2 percent, and fixed investment (business capital spending) grew 9.7 percent. The GDP report, not the jobs report, was the anomaly.
Calanog: The contraction in GDP in the fourth quarter was mostly due to an inventory drawdown and a one-time contraction in defense spending. The latter is a one-time event, the former simply means that businesses will have to restock in the first quarter, leading to more robust numbers. The oft-repeated mantra of a recession being “two quarters of negative GDP growth” is not actually a rule. The National Bureau of Economic Research (NBER) considers a variety of other factors aside from GDP contraction. I assure you that the NBER won't be looking at fourth-quarter 2012 numbers with an eye toward making a pronouncement about a recession in the near future.
There seems to be a lot of chatter across the country about manufacturing coming back, particularly the auto sector. But the numbers reveal only modest gains over the past year in the manufacturing sector. Why aren't we seeing greater gains in that sector?
Bach: The employment component of the ISM manufacturing index rose from 51.9 in December to 54 in January, which suggests some improvement may be forthcoming. That said, exports remain weak at 50.5.
Calanog: The relative price of manufacturing goods in places like China has certainly risen over the last decade, granting the U.S. a bit more of a comparative advantage in terms of labor costs, once transportation costs are factored in. However, even if manufacturers bring back more of their operations to the U.S. that does not necessarily translate to the same number of jobs per unit as we once enjoyed back in the 1960s and 1970s. The relative use of capital versus labor has shifted. Mechanization and better technology means companies may be investing in machinery versus creating more jobs. Still, if this trend continues we should see more manufacturing jobs being created in the U.S. versus a net loss.
Consumer sentiment soured a bit sour in recent months, but Americans still seem to be buying big-ticket items like cars. What’s the takeaway?
Bach: The Conference Board Consumer Confidence Index turned lower, but the University of Michigan Consumer Sentiment Index perked up slightly in January. Consumers most likely were reacting to the expiration of the payroll tax holiday. Improving labor and housing market conditions may trump that in the months ahead.
Calanog: I would never bet against the exuberant faith of Americans in the future. That means we’ll deleverage in the short term if we are forced to pay off credit card bills or we lose our jobs, but over the longer term we'll spend on cars, houses, and putting our children through school.
There is much relevant talk about the changing U.S. demographics like our aging population, and you'll see more political debates about entitlements and such over the next two decades. But our immigration policy is still relatively good compared to other destination countries, and the young ones will keep our labor markets flexible, resilient and buoyant compared to other rich countries. Sentiment will go up and down every month, but I wouldn't short the U.S. economy over the long term.