Not meeting great
expectations

• Job growth well below expectations
• Many factors limiting job gains
• One month does not ring alarm bells
• Underlying expansion remains in place
• One blip no major concern for CRE

The employment situation release for April failed to meet expectations, with net job gains falling well below the 1,000,000 consensus expectation. (Thankfully, we did not forecast last week while we focused on fiscal policy.) As always, we caution about reading too much into one data point. But the result raises two important questions: 1) why did net job gains come in so low? 2) why did professional forecasters expect such a high figure?

Disappointing job gains

A variety of factors combined to produce the relatively low net job gain. While not an exhaustive list, the following includes they key factors behind the figure for April.

1. Enhanced government benefits – For some workers, government benefits (including enhanced unemployment insurance) provides funds exceeding those that they could earn by returning to work.
2. COVID-19 concerns – Some workers, particularly those in positions with a lot of direct interaction with others, remain sidelined because of health concerns. Some evidence suggests a relationship between lower rates of vaccination and difficulty hiring for certain job categories.
3. Caregiving – With roughly 70% of schools still relying on at least partial remote learning, some caregivers cannot return to work. Women, who still bear most family caregiving responsibility, did not increase their participation rate during the month.
4. Retirements – During 2020, retirements among baby boomers exceed the average over the last nine calendar years by roughly 1 million people. They will likely not return to the labor force.
5. Mismatch and upskilling – Some evidence exists to support the idea of a mismatch between the skills demanded and the skills that available workers possess. Evidence shows that some workers, aware of this fact, are spending time upskilling to switch to better jobs.
6. Automation – Out of necessity, some firms automated procedures during the pandemic. That will reduce their desire to rehire.

Why the large forecast figure?

Most forecasters do not release detailed forecasts, making this question difficult to answer. But evidence suggests that the leisure and hospitality industry contributed much to the miss. At this juncture the economy is still largely regaining jobs were lost during the pandemic as opposed to creating new ones. Leisure and hospitality remain net short roughly three million jobs, approximately 37% of the net decline through April. Leisure and hospitality net gained an average of 317,000 jobs over the last three months as these jobs came back online. With the economy further reopening in April, many forecasters likely predicted a large showing for April. But at 331,000 net new jobs, that came in just above the average of the last 3 months. 

Net lost jobs in categories such as business and professional services (due to a noteworthy decline in temporary help), transportation and warehousing, retail, education, and durable goods manufacturing likely also contributed to the high figure because many forecasters likely anticipated gains in most if not all of these sectors. 

The good news

Nonetheless, the report and related surveys contained much positive news. Demand for workers remains robust, with the number of open jobs nearing record highs. Many businesses cite difficulty in hiring, not lack of a desire to hire. Approximately 44% of small-business owners report having jobs they cannot fill, 2200 basis points (bps) higher than the historical average over the last 48 years. Very quickly, the labor shortage that we discussed frequently before the pandemic is returning. The participation rate overall ticked up. Year-over-year wage growth is slowing as many lower-wage jobs come back online, reversing the somewhat artificial boom of the last year when job losses concentrated in lower-wage jobs. While some remain concerned about higher wages filtering through to sustained inflation, we remain less concerned about that for two key reasons. First, many employers are offering one-time bonuses and incentives to workers, not sustainably higher wages. Second, employers are already investing in more technology to boost the productivity of workers which should hold inflation in check (increasing output versus increasing prices to hold profits). 

What else happened last week?

Both the ISM manufacturing and nonmanufacturing indexes for April declined slightly. But neither causes much concern because both reached such elevated levels in March. Each is still signaling a strong economic expansion ahead. Weekly initial unemployment claims continued to drift lower, reflecting continued improvement in the overall labor situation. 

|  What we are watching this week  |

Inflation for April, measured by import prices, the consumer price index (CPI) and producer price index (PPI), should show increasing prices, but the rate should moderate relative to the outsized pace from March. We still expect year-over-year growth rates to tick up, largely reflecting low base effects and an accelerating economy, typical of economic recoveries. Preliminary consumer sentiment for May should increase, likely reaching its highest level since before the pandemic. 

|  What it means for CRE  |

For commercial real estate (CRE), the blip in the job gains should be viewed as just that. We know the situation is improving when a net job gain of 266,000 gets viewed as a disappointment. The underlying recovery trend remains in place and we expect overall economic growth and job growth to accelerate over the next two quarters. We find little concern with this miss relative the outsized expectation. 

|  Thought of the week  |

The U.S. is apparently running low on supplies of chicken due to a fried-chicken sandwich craze, increased demand for wings, and disruptions due to the pandemic.