Labor, Jobs and
Wages… oh my!

Our first regular weekly report of 2020 kicks off with an important look at the labor market.

January 12, 2020

Last week data for December presented a complicated picture of the employment situation as 2019 ended. Overall, the data revealed a labor market remaining tight, but showing signs of slowing. Net employment growth in December totaled 145,000 jobs, falling shy of expectations. Though still preliminary, the data shows that job gains in 2019 totaled 176,000 per month, the lowest figure since 2011, when net monthly gains totaled 173,000 jobs.

Job gains over the last few years look notably weaker and would comport with our view that employment gains are slowing as we exhaust the supply of qualified labor.

Since peaking in 2014, job gains are trending downward over time. Within that downward trend, 2018 appears an anomaly, increasing significantly versus the gains from 2017. But maybe it is not. It seems that the Bureau of Labor Statistics (BLS) exaggerated job gains in recent periods. By how much? Last August, the BLS released its preliminary benchmark revision, which if correct would subtract 501,000 jobs from payrolls as of March 2019. We do not yet know which specific time periods will see an impact. But if we take 501,000 as an annual tally, that translates into roughly 42,000 jobs per month. If we apply that monthly figure to 2018’s data, it would reduce the monthly job gain from 223,000 to 181,000. That would render job gains effectively flat between 2017 and 2019. We will learn the final benchmark adjustment next month with the release of the January 2020 employment situation release. Until then, we simply bring this to the attention of our readers.

This raises an important question: why is the BLS exaggerating job gains? It appears that the way BLS considers the closing of businesses could provide an answer. The BLS assumes that when a business closes, another opens. Yet the BLS does not have evidence of this – in effect it is taken on faith. The BLS then increases its estimate of net new jobs by similar job gains at existing, similar businesses. Last year, this process subtracted over 500,000 jobs from the payrolls data. We expect a similar revision this year. If so, job gains over the last few years look notably weaker and would comport with our view that employment gains are slowing as we exhaust the supply of qualified labor.

If the labor market remains so tight, and we are running out of qualified workers to fill open positions, why is wage growth decelerating?

That presents another seeming conundrum in the data: if the labor market remains so tight, and we are running out of qualified workers to fill open positions, why is wage growth decelerating? Wage growth for the current business cycle peaked last February at 3.4% on a year-over-year basis. In December, the equivalent figure showed a 2.9% growth rate, a decline of 50 basis points (bps). In any given period, some workers’ wages grow more quickly than overall wages and some grow more slowly. Among the industries with slow-growth wages, two industry aggregates stand out: goods-producing (mining and logging, construction, manufacturing) and education and health services. Why do those two stand out? Because of their size. Together, those two categories represent 30% of employment. Goods-producing wages grew slightly slower than overall wages and have accelerated slightly over the last 10 months. Nonetheless, they restrain wage growth.

But education and health services grew by only 1.8% year-over-year. And that represents a significant deceleration since overall wage growth peaked back in February. Then education and health services wages grew at 2.9% year-over-year. Therefore, those workers’ wage growth decelerated 110 bps over the last 10 months. Why? Hard to say for sure, but one possibility strikes us. Many of these positions do not benefit from improvements in technology that generate productivity increases. In many cases education and healthcare workers deliver services in much the same way they always have delivered these services. And that makes it difficult for those workers to command wage increases, even amidst a tight labor market.

One other important dynamic – several states and municipalities have raised their minimum wages in recent years. Some of these areas are among the most populous in country. These changes often occur early in a calendar year, typically in January or February. That would provide a boost to wages early in a calendar year that would not persist in later months. Theoretically, seasonal adjustments could account for this, but even if accounted for, seasonal adjustments do not work perfectly. Something similar could occur again this year with minimum wages in many places set to increase again.

ISM Indexes – more of the same

The ISM nonmanufacturing index registered a robust increase in December, demonstrating that the services sector of the economy, the main engine, remains healthy. That contrasts with the ISM manufacturing index which declined in December to its lowest level since June 2009 at the end of the Great Recession. Manufacturing continues to struggle under the weight of trade policy uncertainty and declining global growth. We expect this to persist in 2020.

What we are watching this week

Inflation and retail sales dominate the calendar this week. The core and headline consumer price index (CPI) for December should show headline CPI increasing to 2.2% year-over-year while core CPI should hold near 2.3%. Though not the Fed’s preferred measure, the data nonetheless demonstrates pricing remains firmer than many believe. The producer price index (PPI) or December should also show an increase but remain well below CPI readings. Headline retail sales for December should show a modest increase. Core retail sales, which exclude autos, should indicate a stronger pace of growth.

What it means for CRE

For commercial real estate (CRE) the slowdown in employment growth and wage growth has not yet presented significant problems. Vacancy rates remain relatively low and rent growth relatively healthy. The expected change in the benchmark would simply reinforce this view: solid performance with even fewer jobs than previously believed. Keeping up this kind of performance will grow more challenging if the slowdown in the labor market persists. Fewer new jobs and slower wage growth would likely translate into a slowdown in consumer spending which would reverberate through the entire economy, slowing GDP growth. That would likely reduce demand for virtually all major CRE property sectors. Thus far, we see little sign of that, but we are keeping a close eye on the labor market this year.

Thought of the week

For only the second time in history, women accounted for a greater percentage of employment than men on establishment payrolls in December.

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