Economic Insights: Mixed signals

Recent economic indicators have been mixed but continued strength in the labor market bodes well for the office sector

April 17, 2019

Consumers still feel sanguine about the economy but are backing away from the most-optimistic levels from recent periods.

Economy sending mixed signals

Anyone looking for clear direction in the economy will not find it in the recent data. Inflation data, showing some fluctuation, remains tame with some signs of cooling. This likely reflects the slowing of the larger economy. The headline consumer price index (CPI) for March increased faster than expectations due to resurgent energy prices, but core inflation disappointed, held down by the largest decline in apparel prices since January 1949 (though we suspect a change in methodology had much to do with this). Similarly, the producer price index (PPI) for March exhibited a surprise gain in the headline figure (also driven by energy prices), but core PPI showed few changes. Following suit, overall import prices for March jumped due to energy increases, but nonfuel import prices declined slightly. Overall, the pricing data in recent periods highlights that absent some pressure from a rebound in energy prices, weakening momentum in the economy is not propping up overall prices.

Reflecting this modest slowing, consumer sentiment for April declined slightly versus March levels. Consumers still feel sanguine about the economy but are backing away from the most-optimistic levels from recent periods. On the labor market front, initial jobless claims fell to a new half-century low, falling below 200,000 for the first time since 1969. And job growth is slowing as labor scarcity continues to weigh on the labor market. Although the number of open positions recently declined slightly, it remains at an elevated level, at roughly 7.1 million positions. Wage gains continue to move higher with labor demand outstripping labor supply. The number of firms citing wage growth as a current or future concern continues to increase, potentially jeopardizing profit margins and risking an earnings recession even if an economic recession does not materialize.

View from the ground

Metropolitan area unemployment figures reflect the strength observed at the national level. Unemployment rates were lower in February then a year earlier in 283 of the 389 metropolitan areas, higher in 67 areas and unchanged in 39 areas. Forty-one areas posted jobless rates of less than 3 percent and only six areas held rates of at least 10 percent. Nonfarm payroll employment increased over the year in 39 metropolitan areas and remain essentially unchanged in 350 areas. This pattern shows the widespread labor scarcity — unemployment rates remain at low levels while job growth is slowing. While not all areas exhibit the same strength, fewer areas are showing weakness, as qualified labor becomes harder to find in almost all metropolitan areas.

What we are watching this week

We expect retail sales for March to significantly rebound after what seems like exaggerated weakness over the prior two months. Housing starts and building permits are likely to increase in March after hitting a rough patch earlier this year. Industrial production looks to accelerate in March after some softening in February. All of this echoes a general pattern of strengthening in the data as the first quarter progressed — earlier weakness followed by increasing strength.

What it means for CRE

For commercial real estate (CRE), the strength in the labor market provides ongoing demand for space, notably in the office sector. National vacancy sat just inside of 15 percent in the first quarter, but five markets boasted single-digit vacancy rates. And several other markets had vacancy rates hovering in the low double digits. While increased density (measured by square footage per employee) has limited demand relative to cycles past, the ongoing hiring of workers has kept demand and vacancy rates relatively stable. Major drivers of demand for office space, such as technology, financial services and coworking have shown little sign of slowing down. Yet, we expect hiring to slow a bit in 2019. And as hiring slows due to continued labor scarcity, we expect to see slight upward pressure on vacancy rates across the country.

Thought of the week

The U.S. federal income tax was first introduced in 1913.

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