Delta's damage?

Quick takes:

• Economic damage from the Delta variant?
• What’s behind disappointing August job growth?
• Any sign of the labor shortage abating?
• Are consumers feeling less optimistic?
• Any fallout for CRE?

Recent economic data show an economy faltering slightly during the latter stages of the summer. While many have quickly pointed to the Delta variant as the cause of the disruption, reality seems more complex. While we do not discount the impact from Delta, a combination of factors is weighing on the recovery. The acute labor shortage, along with other ongoing supply-side disruptions, are also restraining the recovery. The good news? These factors appear temporary and should abate over the coming months.

Labor languishing?

August’s employment situation underwhelmed, with net employment gains falling well below expectations. The labor market generated a net gain of 235,000 jobs, the lowest figure since January and well below 999,000 net new jobs averaged during June and July. Employment in food services and drinking places provided the most compelling evidence for Delta impacting the market – net employment declined by roughly 42,000 jobs in the first monthly decline for that industry since December during the winter surge in the pandemic. This reflects recent weakening observed in other, related metrics likely impacted by the resurgent pandemic, such as restaurant reservations and TSA checkpoint travel numbers.

Yet relatively weak outcomes appeared across industries, many of which also registered a net loss between July and August. Of note for commercial real estate (CRE), the non-residential construction and retail trade industries lost jobs during August. This partially reflects recent readings in construction spending and advance retail sales, which have both bounced between positive and negative growth in recent months. More broadly, the rise in COVID cases is likely having a negative impact on employment in other industries, even those that seem somewhat more insulated against the pandemic. And undoubtedly, the acute labor shortage is also contributing to difficulties in employment gains. As of June, 10.1 million jobs stood open but unfilled, across industries and geographies, presenting a pervasive shortage. Moreover, the labor force participation rate did not change between July and August, despite wages rising 4.3% year-over-year, the fastest pace since March.

Tentatively, it appears as if the recent rebound in the pandemic is peaking, or at least nearing peak. If so, that would help remove some pressure on the labor market as we move into autumn and any potential fifth wave of the pandemic. The recent expiration of the extended unemployment benefits could also bring some participants back into the labor market, though that will likely provide small (if any) gains. The return of children to school should help some parents return to the workforce. And workers that underwent retraining and upskilling should return over time. Overall, we expect job gains to rebound from the August lull.

Consumer confidence cratering?

With the Delta variant driving cases higher, consumer confidence took a hit in August, with the index falling to its lowest level since February. Consumers appear concerned about both current and future conditions and these are outweighing their positive feelings about the strength in the labor market. The forementioned expiration of unemployment benefits could also weigh on confidence over the next month but continued hiring and wage gains could help to offset those concerns.

Net employment change in thousands

What else happened last week?

Despite some bumps in the road, the data also showed some positive signs. The ISM Manufacturing Index for August increased, surprising to the upside. Strong reading for both production and new orders drove the index higher. Additionally, the index showed some signs of supply bottlenecks easing, but factors such as the pandemic will continue to play an important role in easing supply-side pressures. The ISM Services Index for August declined slightly, but remained at elevated levels, suggesting a robust expansion. Pent-up demand for services continues to get released and a declining pandemic should only support that. Lastly, any concerns surrounding the economic impact from Hurricane Ida should prove temporary, as weather-related disruptions typically do.

|  What we are watching this week  |

The producer price index (PPI) for August should turn out similar to what we observed in the consumer-oriented inflation indexes: price pressure continues but is likely decelerating. Easing supply constraints coupled with somewhat lessening demand should help. Initial unemployment claims should slightly decline, continuing their inconsistent downward trend. 

|  What it means for CRE  |

For CRE the Delta variant mostly delays the inevitable. Many companies pushed back their return to the office with a rebound in cases. Ultimately that should not have much impact on companies’ ultimate decisions. Consumers continue to return to physical retail spaces with renewed fervor, even with some recent wavering in spending. Even the downturn in restaurant reservations should not persist as the current wave abates and vaccinations (and boosters) continue. Business and leisure travel, which clearly took a hit in recent weeks, should revert to their recovery trends in the coming months. By the end of the year, any impact from Delta on CRE should prove minimal. 

|  Thought of the week  |

The Delta variant is also producing ripples in other major economies around the world, likely reducing global growth in the short term.