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Labor market still strong

​Don't Be Fooled By the Headlines – The Labor Market Remains Strong

Do not let the headlines mislead you. The U.S. labor market remains tight. Hurricane-related disruptions to the labor market in economically important places – Florida and Texas – produced an artificial contraction in the number of jobs in September. The number of workers with a job but unable to work due to weather leapt by 1.5 million in September. Technically, payroll employment declined for the first time since September of 2010. But that disruption will be temporary and may reverse by the time September's data is finalized. On the other side of the ledger, 

the evidence in favor of a strong labor market continues to grow. We maintain our view that labor scarcity, not job scarcity, is the bigger problem in the U.S. 

 

How can we be so confident? Metrics that signal labor scarcity are not reversing.  The number of open but unfilled positions in the U.S. reached a record high of roughly 6.2 million jobs in September. Employers' struggles to find qualified workers has intensified over time. This is reflected in virtually every measure of unemployment. The headline unemployment rate fell to 4.2 percent, the lowest rate since February of 2001. The unemployment rate for those holding a bachelor's degree fell to 2.3 percent, a post-recession low. And the broadest measure of unemployment, the U-6 unemployment and underemployment rate, fell to its lowest level since June of 2007.

The tightness in the labor market may finally be translating into greater upward wage pressures. In September wages grew by 2.9 percent on a year-over-year basis despite slowing inflation. Although wages during the economic expansion have previously accelerated in a similar manner, only to fall back, the continued tightness in the labor market may finally result in a more durable acceleration in wage growth. The catastrophic weather in August/September also distorted wages so we will need to see a longer trend to determine if underlying wage growth is truly accelerating. Nonetheless, the industries with wage growth lagging behind the overall labor market generally tend to be the ones with lower labor productivity growth such as mining and logging, manufacturing, education and health, and trade, transportation and utilities. Wages are growing above average in industries with stronger productivity growth such as information, business and professional services, and other services.

Increasingly, as labor becomes more expensive and harder to find, the marketplace is resorting to innovative ways to better match available workers with demand. For example, the dearth of construction workers in many parts of the country has been well-documented. That's why wages in that industry are rising slightly faster than average wages. Yet many workers who could be employed in the construction industry reside in locations with little to no demand for construction workers. The solution? Employ workers in low-demand areas who offer a wage discount and have them reside in cheap hotels while working on a project in labor-scarce areas. These workers are willing to travel for the opportunity to earn income. These projects can last a number of weeks and are a win-win for all of those involved because it provides better labor-matching, even once travel and hotel costs are taken into account. While not all workers can take advantage of this, the energy industry already demonstrated that it can be an effective, temporary solution to labor scarcity.  The mismatch between where the supply of workers and demand for them are located continues to be one of the key structural impediments to an even stronger economy and labor market. Anything that alleviates this mismatch is welcome.

What does this mean for CRE?

For commercial real estate, the data paints a mixed picture. Labor scarcity, particularly among the higher-productivity industries such as information and business and professional services, will restrain demand for office space. With construction increasing, vacancy is slowing rising in a number of markets. But 

stronger wage growth should create more discretionary income which should be good news for the retail sector. 

With the majority of sales still occurring in physical stores and more store openings than closings this year, a reinvented retail sector could benefit from higher wages and greater discretionary spending. That should help support higher rents, which have yet to reach pre-recession levels. And better labor matching, especially in the construction sector, could result in fewer construction bottlenecks, even as construction wages rise. Labor scarcity has not been the only factor restraining new construction during the current economic expansion, but it has certainly been complicit. Finally, 

young adult employment continues to improve, exceeding other age groups for the 18th time in the last 19 months. This will prop up net absorption in the apartment sector 

which will be greatly needed this year – 2017 should be the high watermark for apartment construction during this cycle.

What else happened last week?

Other data releases pointed to a robust economy. The ISM Manufacturing Index rose to its highest level in 13 years while the Non-Manufacturing Index rose to its highest level since 2005 during September. Hurricane-related delays in deliveries likely drove both metrics higher. Those should reverse in the coming months, but the underlying trends in both indexes remains strong and indicative of a healthy economy. In a heartening sign for other metrics distorted by the hurricanes, initial weekly unemployment claims continue to decline as anticipated. And the trade balance for August showed a slight decline in the deficit with imports pulling back a bit while exports rise. Stronger global economic growth should prop up exports, providing hope that trade provides less of a drag on GDP growth in the coming months.

What we are watching this week

The tax reform legislation continues to proceed in both houses of Congress. We think there is a better than 50 percent chance in legislation passing this year, but momentum will need to be maintained in order for that to happen. President Trump is scheduled to meet with Canadian Prime Minister Trudeau this week and the Boeing-Bombardier dispute should surely be on the agenda. While many steps remain before any sort of tariff would be imposed, we are growing increasingly concerned about the risk of trade policy becoming a drag on the economy – disputes could easily result in beggar-thy-neighbor policies in what becomes a race to the bottom with many losers and no winners. We should also receive measures of inflation and retail sales for September. We expect little change in either the consumer price index (CPI) or producer price index (PPI) measures of inflation, but retail sales should rebound from their unexpected slump in August.

Thought of the week

Over the last year the number of non-store retail jobs created has been roughly equivalent to the number of department store jobs lost. Surely, a sign of the times.




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