Research

The Labor Market-Consumer Nexus

Consumers are spending, but business are pulling back. What does that mean for investment in commercial real estate?

December 04, 2019

With business investment declining and the manufacturing sector contracting, consumer spending should drive the economy in the coming quarters.

The Labor Market-Consumer Nexus

Heading into the last month of the year, the nexus between the labor market and consumers takes on increasing importance. With business investment declining and the manufacturing sector contracting, consumer spending should drive the economy in the coming quarters.   But that spending depends upon the health of the labor market. Despite many casting aspersions toward the labor market, it remains incredibly strong with demand exceeding qualified supply and positive real (net of inflation) wage growth. That strength is driving consumer confidence and sentiment (two different measures) to elevated levels and providing consumers with the cover they need to continue spending, especially heading into the important holiday shopping season. Spending data for October showed consumers spending at a relatively healthy rate despite some slowing. And a robust Black Friday, with consumers shelling out over $7 billion online (up roughly 14% from last year), reflects this dynamic.

The year-to-date figure shows job gains registering their lowest total since 2010 during the nascent stages of the labor market’s recovery. As we have stated many times, scarce supply is pulling net job gains down, not weakening demand.

But as the economy increasingly relies on one engine for growth, the labor market is coming in for closer scrutiny. In recent weeks, weekly unemployment claims have shown some slight but inconsistent upticks. The overall trajectory still looks favorable, but any signs of upward movement should get amplified by the press and analysts, looking for signs of trouble. Additionally, net employment has also shown signs of slowing with net payroll gains slowing in 2019. The year-to-date figure shows job gains registering their lowest total since 2010 during the nascent stages of the labor market’s recovery. As we have stated many times, scarce supply is pulling net job gains down, not weakening demand  . Slowing job gains restrain economic growth and any sign that demand is slowing will also become amplified because of the impact it would have on an economy that is already slowing.

Third-Quarter GDP Growth Revised Up Slightly

Revisions to GDP growth during the third quarter showed a slight acceleration relative to both the previous estimation and second quarter’s growth rate. Improved contribution from inventories pushed growth slightly higher. Heading in the fourth quarter, some models predicted dire results with growth falling toward zero. Many of those predictions improved with more data as the quarter rolled along. We still foresee growth slowing over the next few quarters, but growth should remain positive.

What we are watching this week

The employment situation release for November should rebound a bit and show continued job gains, though fall shy of the 200,000 mark.  We expect virtually no change in the unemployment rate, holding steady near 3.6%. Hourly earnings should continue to increase, with the year-over-year growth rate remaining near 3%. And weekly initial jobless claims should stay low, hovering near recent levels, indicating little sign of trouble in the labor market. We expect little change to consumer sentiment in December’s preliminary reading. We expect the ISM manufacturing index for November to decline slightly, indicating continuing contraction in the manufacturing sector. Meanwhile the ISM nonmanufacturing index for November should hold above 50, indicating of continued expansion in the sector.

What it means for CRE

Heading into the home stretch, commercial real estate (CRE) continues to perform in line with our expectations. No matter the short-term ups and downs in the economic data this year, CRE acquitted itself quite well. Investors who follow our weekly will not be surprised and were likely rewarded with attractive performance. While it is a bit too early to start talking about next year in detail, all of the markets and property types that we forecast should continue that run through December, heading into 2020. CRE continues to provide attractive relative yield versus other major asset classes and excellent diversification benefits. If anything, the chase for global yield (which comes along with increased investment concentration) should only serve to strengthen these benefits. More than 10 years into an economic expansion, CRE investors continue to reap rewards for the efforts.

Thought of the week

Roughly 40% of America’s Nobel Prize winners in the sciences since 2000 have been immigrants.

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