Hitting a new low

Quick takes:

• Jobs data below expectations
• Delta variant still disruptive
• Fed still likely to start tapering
• Backing away from the debt ceiling abyss
• CRE still focused on long term

The September employment situation, released last week, garnered more attention than usual. While the monthly employment data are always closely watched, two things set September apart. First the Fed announced its intention to taper quantitative easing (QE) contigent upon the labor market's continued recovery. Second, the September data provided some insight into whether the economy had moved past the Delta-induced summer swoon. The underwhelming results should prove enough to clear the Fed’s low threshold for the tapering announcement, but also showed a labor market (and economy) still dealing with the fallout from summer pandemic surge.

Delta blues

The data showed that the labor market created 194,000 net new jobs in September. That came in well below expectations, which observers had revised upward after the ADP data, released two days prior, showed positive upside surprise. Excluding local education employment, which decreased largely due to seasonal factors, most of the weakness stemmed from meager job creation in services-oriented industries such as accommodation, food services and drinking places. Renewed hesitancy from consumers because of the resurgent pandemic during the third quarter stymied job gains. TSA checkpoint data, online restaurant and bar reservation data, and hotel occupancy data all show a pullback by consumers which reduced demand for services and consequently hiring. 

Yet the data provided some positives as well. The unemployment rate continued to decline, falling by 40 basis points (bps) to 4.8%, a precipitous one-month decline and a pandemic-era low. While some of that occurred because of a lower participation rate, empirical research shows that a low unemployment rate (more than wage growth) tends to drive people back in the labor market and boost job growth. Therefore, we view continued declines, regardless of cause, as a positive. Wage growth continued to trend upward after a period when wage growth spiked, then collapsed, due to a drastically changing group of employed workers. This more-consistent upward pressure on wages reflects the ongoing labor shortage, which should continue to force wages higher.

Whipsaw wage growth

Fed set to sing a different tune

Though disappointing, the data should prove sufficient for the Fed to announce the beginning of tapering, possibly as soon as the upcoming November meeting. While Chair Powell did not specifically define what a “decent” recovery would look like – the hurdle required to start tapering – consensus feels that the September data qualified. Though to be fair, the Fed not specifically defining the word “transient” has proven problematic as frequent readers of our weekly surely know. The Fed will reduce asset purchases, slowing the growth of its balance sheet before the start of rate hikes which will likely commence in late 2022. Nonetheless, we anticipate that the Fed’s balance sheet will remain inflated, partially as a function of the size of the economy, partially because the banking system is awash in reserves (forcing the Fed to use other tactics to implement monetary policy), but also because complete withdrawal would likely prove massively disruptive after 13 years of meaningful intervention. 

Dancing on the ceiling

Last week the Senate struck a deal to temporary extended the debt ceiling by $480 billion which should last until roughly December. The House is voting on the deal this week and will very likely pass it to avoid economic disaster. But like much in government these days, this agreement represents a kick of the proverbial can down the road (and not very far down the road) rather than resolving the underlying issue. The next round of negotiations could prove even more contentious, and Congress continues to play with fire via the periodic raising of the debt ceiling, something that other developed nations have found ways to avoid. Therefore, we see this simply as a short sigh of relief. 

|  What we are watching this week  |

Inflation for September, via the consumer price index (CPI) and producer price index (PPI) should continue to show divergent changes. The CPI should continue to show inflation peaking while PPI should continue to show rising inflation. Headline retail sales should change little with risk to the downside while core retail sales should show a modest increase. Consumer sentiment for October could take a hit with the pandemic outweighing the tight labor market effect. 

|  What it means for CRE  |

For commercial real estate (CRE), recent disruptions should prove temporary. The labor market should move past third-quarter weakness as the current wave of the pandemic abates and consumers unleash pent-up demand heading in the holiday shopping season. The labor shortage should restrain job growth, but above levels of the last few months. The debt ceiling issue, too catastrophic to even model if it were not raised, should get resolved, even as the government keeps kicking the can down the road. The CRE recovery should continue to key off the overall economic improvement and see through these temporary impairments. 

|  Thought of the week  |

About 30 billion apples are grown annually in the U.S.