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Jobs, jobs and more jobs!

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​Strong job gains continue

The labor market's strong performance continued in February, exceeding expectations with a surprising net job gain of 313,000. Well-diversified job gains occurred across a number of industries. Of note, construction led the charge with a net gain of roughly 61,000 jobs, distributed roughly evenly across residential and non-residential segments.

Retail, the Lazarus of the Labor Market, reversed the trend
from recent periods gaining roughly 50,000 jobs. 

And business and professional services, the largest job-gaining industry over the last 12 months, netted another 50,000 new jobs. While we anticipated that the tax legislation could spur some short-term surge in job creation, it appears that the large headline figure overstates strength due to weather impact. A relatively calm February significantly reduced the number of workers who did not report to work because of inclement weather.

Despite the large payroll gains, the unemployment rate held at 4.1 percent due to jump in the labor force participation rate. But such outsized increases in labor participation should not persist, opening the door for unemployment rate declines in the coming months. Wage growth disappointed a bit, falling from 2.8 percent on a year-over-year basis in January to 2.6 percent in February. But this follows outsized gains in December and January that were not sustainable. And the wage gain in February 2017 was notably strong, dampening the year-over-year change. We would not make too much of one month's data, especially since it will not be finalized for a couple of months. Those inclined toward technical analysis note that wage growth has hit 2.8 percent on a year-over-year basis three times in the last two years, only to pull back. But there is nothing special about 2.8 percent and the overall trend points upward. Wage growth has been stymied during this expansion by weak inflation and productivity growth. But as the labor market continues to tighten it can overwhelm the fundamental economic forces restraining wage growth.

Political risks are building

Enthusiasm for the labor market was tempered by the increased political risk coming out of Washington on two intertwined fronts. The president pushed ahead with his plan to implement tariffs on steel and aluminum imports. Although the measures included exemptions for Canada, Mexico, and Australia, and the ability for trading partners to make their case for exemption, risks to our outlook are building. The tariffs threaten escalation in trade protectionism, if not an outright trade war, either of which would damage the U.S. and global economies. Even without retaliatory measures from trading partners, the tariffs should produce more negatives than positives.

Any benefit to the metal-producing industries will be
offset by detrimental impacts to metal-using industries
and to consumers ultimately.

The tariffs should also exacerbate inflation at a time when prices are already rising.

In the wake of the tariffs, Gary Cohn, the Director of the National Economic Council (NEC) and the president's top economic advisor, announced his resignation. While high-level resignations have seemingly become commonplace occurrences, this one holds implications for the economy. Mr. Cohn did not abide isolationist and protectionist stances, particularly regarding international trade. He was viewed as a steadying hand by the markets. In his absence, protectionist voices such as Robert Lighthizer, the U.S. Trade Representative, Wilbur Ross, the U.S. Commerce Secretary, and Peter Navarro, special advisor to the president could be heard more loudly and clearly by the administration.

What else happened last week?

The ISM Non-manufacturing Index declined slightly in February, but held at an elevated level, indicative of a strong service-sector expansion in the economy. Initial jobless claims for the week of March 3 increased slightly, but the increase came after initial claims reached its lowest level since 1969. The international trade deficit widened in January. Although global economic growth continues to accelerate, presenting a favorable environment for exports, domestic tax cuts and increased deficits are likely to spur greater increases in imports, further widening the trade deficit and creating a drag on economic growth.

What it means for CRE

The job market's strong performance can only be viewed as a positive for commercial real estate (CRE). We worry about the sustainability of such strong gains this late in the economic cycle, particularly once the stimulus from the tax cuts recedes. Until then, all major property types should benefit, particularly apartment and office which are further into their respective cycles than retail and industrial. At a point when apartment and office are experiencing rising vacancy on a national basis, even a temporary acceleration in job growth can have a positive impact. Industrial and retail should benefit as well, but both property types, particularly industrial, have a somewhat longer runway ahead of them.​

What we are watching this week

A deluge of economic data will be released this week, key among it will be inflation and sales data. The headline consumer price index (CPI) for February should pick up slightly on a year-over-year basis while the core CPI should remain unchanged. The produce price index (PPI) should accelerate a bit in February due to stronger commodity prices. Retail sales for February, both headline and core, should bounce back after a relatively tame January. Housing starts and building permits both likely declined in February. Consumer sentiment for March looks like it might finally reach a peak this cycle, but should still remain at elevated levels. 

Thought of the week

Revelers will spend roughly $6 billion ($40 per person) on St. Patrick's Day festivities this year. Sláinte! ​

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