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Storming past disruptions?

Labor market is hurricane-proof

The labor market stormed past temporary disruptions from rough weather in September to gain 261,000 net jobs in October. Although that figure fell below expectations, revisions to prior months added a net 90,000 jobs (which partially explains the lower October figure) including a reversal in September from a net loss of jobs to a small net gain. The total number of jobs has not contracted since September 2010. The unemployment rate fell to 4.1 percent, its lowest level since December 2000 while the broader unemployment/underemployment rate fell to 7.9 percent, its lowest level since December 2006.

Lack of qualified labor restraining job growth

After peaking in 2014 at 250,000 net new jobs per month, the number of jobs created has continued to trend downward: 226,000 net jobs per month in 2015, 187,000 net jobs per month in 2016, and 169,000 net jobs per month in 2017 year-to-date.  This pattern reflects a maturing labor market and has been present during nearly every business cycle. 

With more than 6.2 million open but unfilled positions in the U.S., a lack of qualified workers remains the largest hurdle to job growth. Effort would likely be better spent on training workers so they can fill open positions rather than on simply trying to create more jobs that will go unfilled. Given the lack of available labor, some companies have developed free schooling (often along with the promise of a job) in order to train the workers that they need rather than wait in vain for qualified workers to materialize. 

Wage growth reversal, but reason for hope

Wage growth, the only blemish on the labor market’s record, slowed more than expected. The effective elimination of low-wage jobs in September caused a mini-surge in wage growth to 2.8 percent on a year-over-year basis. But that surge more than reversed in October. Wage growth fell to 2.4 percent year-over-year, the slowest pace since February 2016, because those low-wage jobs returned to the market. Although superficially disappointing, reason for hope exists. Productivity, one of the key determinants of wage growth, rebounded sharply during the last two quarters. On an annualized basis, non-farm labor productivity grew by 3 percent in the third quarter, double the rate from the second quarter and the best showing since the third quarter of 2014. That represents a stark reversal from earlier this year when growth was effectively zero. 

If the market can maintain this productivity growth, faster wage growth could appear over the next year. 

Fiscal stimulus odds at roughly 50 percent

House Republicans released the details of their long-awaited tax plan last week. Undoubtedly, the plan will be changed in both the Ways and Means Committee and the entire House before a vote is taken. Because the budget resolution capped the maximum deficit at $1.5 trillion over ten years, some offsets were needed to make up for lost revenue from reducing corporate and personal income tax rates. Many are unhappy with these proposed changes (such as limiting the mortgage interest deduction) so there is still some horse trading to be done and there is a chance that the bill doesn't pass. We still see the likelihood of passing the legislation at roughly 50 percent this year. A package of $1.5 trillion could add up to 50 basis points of economic growth in 2018 before becoming part of the economic base and fading in 2019.

No change to interest rates and new Fed chair announced

No surprising news from the Fed last week. The Fed decided to leave rates unchanged and the policy statement contained no substantial changes. The Fed's assessment of the economy remained relatively optimistic. Unless there is a dramatic shift in the trajectory of the economy in the next month, which seems unlikely, the Fed remains on track for a third rate hike for 2017 in December. The futures market is assigning what is effectively a 100 percent probability of a hike next month so the Fed will not want to disrupt markets unless it is absolutely necessary. Also last week, the president nominated current Fed governor Jerome Powell to be the next Fed Chair. Congress will almost certainly approve him. Though not an economist, he has been on the Board of Governors for five years. He will likely maintain the status quo on interest rates, although he is known as being more open to potentially easing regulations than outgoing Chair Janet Yellen.

What else happened last week?

The ISM Non-Manufacturing Index increased in October to its highest level since August 2005. The service sector appears firm, particularly this late in an economic expansion. The ISM Manufacturing Index declined slightly in October. But the decline was modest and at its current level the index is still signaling broad strength in the manufacturing sector of the economy. 

Consumer confidence leapt to its highest level since late 2000. Such elevated confidence could portend a good holiday shopping season. 

What does it mean for CRE?

The continued slowing in job growth means that leasing activity for office space will largely come from relocations and renewals and not expansions. In the face of rising new construction, vacancy rates should be flat to slightly up in a number of markets across the country. 

The prospect of faster wage growth and high consumer confidence could mean an improvement in demand for retail space late this year (heading into the holidays shopping season) and early next year. 

Any improvement should be marginal, but with new construction at such low levels even a modest improvement in demand will bring lower vacancy rates and higher rents. And continued job gains and wage growth among young adults should backstop demand for apartment units as the market works through a post-recession high in new construction in 2017.

What we are watching this week

The job openings and turnover survey for September will indicate if the dearth of qualified workers in the economy continues to grow. Consumer sentiment for November will be released and should signal ongoing consumer optimism amid a very tight labor market. Jobless claims should show that most of the impact from the hurricanes has passed.

Thought of the week

Last week the Bank of England (BOE) raised interest rates for the first time in a decade. Rates increased by 25 basis points and the BOE communicated that this would be the start of gradual increases for the next few years. ​

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