The employment situation

Last week’s employment situation release contained some good news and some bad news. First the good news. The labor market generated 225,000 net new jobs in January, far ahead of expectations. Year-over-year wage growth ticked up slightly to 3.1%, marking the 18th consecutive month at or above 3%. Revisions to the historical data show that peak year-over-year wage growth for this expansion reached 3.5% in 2019. The unemployment rate increased slightly to 3.6%, but this was driven by an increase in the labor force participation rate which reached its highest level since 2013. In sum, the data showed the despite some weakness in business sentiment and in private investment and the continued shortage of qualified labor, the labor market remained firm in January.

Yet, the labor market did not perform as well in earlier periods as previously reported, which brings us to the bad news. Benchmark revisions subtracted job gains, primarily in 2018, in line with our expectations; changes to other years occurred, but in small amounts. The changes make 2018 look less robust than previously thought. Before revisions, data showed that job gains in 2018 totaled 223,000 net new jobs per month. After revisions, the data shows a gain of 193,000 job, a loss of 30,000 per month or 360,000 for the year. For 2019, current figures show job gains of 175,000 net new jobs, the worst performance since 2011. The data marks a downward trend over time, with job gains peaking in 2014. With supply of labor still limited, demand for labor will take on increasing importance as we push further into 2020.

While publicly traded markets clearly sloughed off any risks from the coronavirus, the issue remains a wild card for the economy, at least in the short term. Some signs have emerged that the spread of the virus could be peaking. Should the impact from the virus (via shutdowns in production, limitations on travel, etc.) prove ephemeral, we expect little fallout for GDP growth, which would likely reverse itself relatively quickly. Should the impact prove more durable, then the fallout for the economy could last longer and cut deeper. China (or at least parts of it) intends to restart production this week after an extended lunar new year holiday. Comparisons to the outbreak of SARS in 2003, while expected, present some issues. Back in 2003 China represented just 4% of the global economy with somewhat limited connectivity with the rest of the world. Today, China’s economy represents roughly 16% of the global economy with much greater connectivity with the rest of the world via trade, investment, and travel. The exact impact of the coronavirus should become clearer over the coming months. 

The ISM indexes for January both showed increases, signaling some signs of resurgent optimism. The ISM manufacturing index leapt up into expansionary territory for the first time since July 2019. It seems that manufacturing businesses received a fillip from the Phase One trade agreement signed in December. Meanwhile the ISM nonmanufacturing index increased slightly versus December’s reading. The services sector of the economy continued to expand in 2019, even while manufacturing struggled. And the services sector clearly pulled that momentum into early 2020. 

Consumer-centric measures will dominate the data releases this week. The consumer price index (CPI) for January should show slight gains. The headline CPI should continue to show upward momentum in pricing, but we expect little change to core CPI. Retail sales for January should show the year off to a pretty good start. We expect relatively robust gains in headline and core retail sales. That dovetails with our expectation for consumer sentiment in early February – we anticipate a still-elevated reading near 100, indicative of consumer optimism. And we will be closely monitoring job openings for December for any sign of continued weakening in demand for labor. 

For commercial real estate (CRE), historical revisions to data seem like interesting footnotes, and not much else. Clearly the sector did not suffer from lower job gains. The labor market for 2020 matters far more than any historical revisions. We still foresee limited impact to CRE from the fallout from the coronavirus but emphasize that so much remains unknown and the precise impact will remain murky for some time. And a resurgence in manufacturing, if that is in fact occurring, presents only upside benefit for CRE. While manufacturing properties do not constitute a large percentage of industrial inventory, an increase in goods produced could prove beneficial to demand for warehouse and distribution space. 

According to the NRF, consumers plan to spend an average $196.31 on Valentine’s Day, an increase of about 21% versus last year’s record of $161.96. Total spending should total roughly $27.4 billion.