Skip Ribbon Commands
Skip to main content

Quitters never win

​Download PDF

Strong sales in April signal better growth ahead

Led by strong consumer activity, economic growth looks set to accelerate in the second quarter. Retail sales for April grew at a vibrant pace, broadly distributed across many categories. Encouragingly, core retail sales also grew at a brisk pace and the data for both February and March was revised upward.

This upsurge in consumer spending hints at stronger economic growth
ahead in the middle two quarters of this year because the consumer still represents
the majority of economic activity in the U.S. 

Other data released last week also supported the notion of stronger economic growth ahead. Businesses are also picking up the pace of activity:  industrial activity for April grew at a healthy pace while two regional Fed surveys in April for Philadelphia and New York also signaled strengthening.

Housing sends some mixed signals        

Housing data sent some mixed signals last week. Housing starts and permits both fell while the headline index for the National Association of Home Builders rebounded. But we are not overly concerned with the headline figures. The decline in starts follows a previous level that looks somewhat inflated while permitting activity remains up relative to last year. Beneath the headline figures starts and permits for multi-family properties declined while those for single-family properties increased. While a combination of factors is certainly contributing to slow recovery in housing, a key concern of ours in the housing industry remains the lack of qualified labor. The labor shortage complicates an already challenging situation for construction by limiting supply growth, which has contributed to the rising home prices that have now surpassed the previous peak of 2006 (before the previous recession).

Quitters never win? Not in the labor market

Speaking of the labor shortage, it is beginning to drive worker behavior. Employees are quitting jobs at a level not consistently seen since 2005. Why? Because annual wage growth for people who job switch is running about 100-150 basis points higher than for people who remain in their job. On a 12-month rolling basis, the difference between job switcher and job stayer equals roughly 100 basis points, but over the last 4 months that difference has averaged roughly 150 basis points. The labor market last breached both of those thresholds in 2001.

Many workers are feeling confident enough about employment prospects elsewhere
(in a tight labor market) to leave for a bigger compensation package.

Will this spur employers to give their current employees larger annual increases? Though impossible to say for sure, the empirical data strongly suggests that when the wage growth rates between job switchers and job stayers widens above 100 basis points, wage growth for job stayers accelerates in later months and narrows that gap.

Other data shows that tightening in the labor market is continuing, which could also serve as a catalyst for faster wage growth. Last week the four-week moving average for initial unemployment claims reached its lowest level since 1969 when the labor force stood at only roughly half the size of today's labor force.

And the number of open, but unfilled positions (6.6 million) now exceeds
the number of people technically unemployed (6.3 million).

Although employers have been holding the line on wage growth during the current expansion, the acute labor shortage, which we have written about extensively, could finally motivate employers to pay larger annual increases.

Implications for CRE

Acceleration in the economy toward the middle of this year should support commercial real estate (CRE) fundamentals and capital markets. Retail could most directly benefit from this due to the resurgence of the U.S. consumer. And although the supply/demand dynamics for most property types are slowing at this relatively late stage of the business cycle, a fiscal stimulus-fueled boost should provide support to the market. Some evidence of this is already emerging in the CRE debt markets. According to the Fed's senior loan officer opinion survey, CRE lending standards at banks recently loosened for the first time in roughly three years as banks face tougher competition. That loosening, all other things equal, should help to boost both the acquisition market and the refinancing market. The decline in construction of multifamily properties should help market fundamentals, although there's still a robust supply pipeline. And as we have previously written, the ongoing labor shortage negatively impacts the economy and all CRE property types, though not equally.

What we are watching this week

The minutes from the Fed's May meeting should affirm our belief that another rate hike of 25 basis points will occur at June's meeting. And a trio of segments of the economy will provide a broad reading on economic health. New and existing home sales for April should diverge with new sales down a bit and existing sales up a bit. Through the monthly volatility, the overall trend for both series is still heading upward.  Durable goods orders for April should come in roughly unchanged versus March. And the final consumer sentiment for April should drop slightly versus the preliminary reading, though remain at an elevated level.

Thought of the week

Last week the 10-year Treasury rate reached its highest level since 2011 while the odds of a fourth rate hike in 2018 (of 25 basis points) now stands about even.

Get our latest insights


Connect with us