One Incredibly Tight
Can commercial real estate be powered solely on the strength of the labor market? It’s a definite possibility, for now.
We are running out of superlatives to describe the strength of the U.S. labor market.
What more to say?
We are running out of superlatives to describe the strength of the U.S. labor market. The November employment situation report showed that payroll gains substantially exceeded expectations and totaled a robust 266,000 net new jobs, the highest figure since January. While that number is somewhat inflated by the return of GM manufacturing employees after their strike ended, controlling for that produces payroll gains in excess of 200,000. The headline unemployment rate declined by 10 basis points to 3.5%, a new half-century low. Year-over-year wage gains declined slightly to 3.1% but have held at 3% or greater for 15 consecutive months. Rather than continue to extoll the virtues of the labor market, examining a few key criticisms should prove instructive in understanding widespread labor market strength:
- The headline data overstates employment because many people are working part-time involuntarily or cannot find work. Two key data points refute this. First. The number of people working part-time involuntarily is hovering near levels from the previous expansion in the 2000s and is below levels from the 1980s despite the economy and labor force growing since then. Though the current figure sits above levels from the dot.com expansion of the 1990s, the frothy economy overstated strength in the labor market during that time and the labor market was smaller in the 1990s. And the broadest measure of unemployment, the U6 rate, includes involuntary part-time workers. It declined to 6.9%, matching September for the lowest figure since December 2000.
- Despite job gains, still not enough people are working. Normally when someone levels this criticism, they cite the employment/population ratio (EMRATIO). Though rising in recent years, the EMRATIO sits at 61.1%, well below its peak from the previous three expansions. But today’s population differs in two key ways. Demographically, the median age in the U.S. continues to increase. The large number of people nearing, or above retirement age, lowers the EMRATIO. The other key population factor: younger people are not working as much as they did in the past. While often cited as a weakness in the labor market, younger people are actively avoiding work not because of lack of demand, but because a greater number of them than in the past choose to spend their time studying, traveling abroad, or in specialized camps, ostensibly to improve their chances at college admissions. Instead of the overall EMRATIO, we prefer to examine the EMRATIO for prime age workers (25-54 years of age). This ratio recently hit 80.3%. Only during the inflated dot-com era did the 25-54 EMRATIO exceed 80.3%.
- Inferior-quality jobs are created now, unlike in the past. This criticism holds some merit. The recently published U.S. Private Sector Job Quality Index (JQI) aims to capture the quality of jobs by measuring desirable higher-wage/higher-hour jobs versus lower-wage/lower-hour jobs. The JQI presents a proxy for the health of the labor market. The JQI shows that job quality generally continues to decline over time, from the 1990s to today. Yet more than 7 million jobs (many of them high-quality jobs) remain open, but unfilled. How to reconcile these things? By reiterating something we frequently say: we do not lack individuals, we lack qualified workers. The workers who cannot obtain high quality jobs suffer from a mismatch: either a skills mismatch or a location mismatch.
ISM Indexes disappoint again
The ISM manufacturing index declined slightly in November, in line with our expectations. The index came in below 50, indicating a contraction in the sector, for the fourth consecutive month. Survey respondents continue to cite global trade as their key concern. We expect this to persist amidst ongoing trade policy uncertainty. The ISM nonmanufacturing index also declined in November. Respondents cited both the labor shortage and trade issues as negatives for business. Although the sector continues to expand, it clearly slowed over the latter half of 2019. Together, these potentially point to some risks for growth in 2020.
Trade deficit narrows, but for the wrong reasons
The trade deficit in October narrowed to its $47.3 billion, the lowest since May 2018. But it narrowed because of declining imports, not rising exports, reflecting slowing global growth and ongoing trade issues.
Retail sales for November should show continued, healthy spending from consumers.
What we are watching this week
We will receive a slew of inflation data for November. Both the headline and core consumer price indexes (CPI) should show monthly increases that should push the headline year-over-year reading near the Fed’s target level of 2% and keep the core year-over-year reading above target, near 2.3%. The headline producer price index (PPI) should show a monthly gain, causing the year-over-year figure to reaccelerate after reaching its slowest pace since September 2016 during October. And retail sales for November should show continued, healthy spending from consumers.
What it means for CRE
The tight labor market continues to provide the engine for commercial real estate (CRE). Though last month’s pace of job growth will almost certainly not continue, ongoing job gains continue to hold vacancy rates across property types and markets near lows for the current cycle. Nominal and asking rent growth also remain positive. The employment situation reinforces our view from last week – that the labor market continues to take on increasing importance for both the economy and CRE. It will warrant close watching as we head into 2020. But for now, that one engine of growth continues to keep the CRE train rolling.
Thought of the week
Paul Volcker recently passed away at age 92. The former Chairman of the Fed successfully defeated high inflation in the late 1970s and early 1980s by significantly raising interest rates. Prices in the U.S. remain remarkably stable almost 40 years later.