Labor market
warning signs?

• Labor market issues warning
• Some industries still losing jobs
• Other signs of slowing abound
• A new hope for stimulus?
• CRE hopes to avoid downside case scenario

The labor market data released last week reaffirmed the view that we asserted in our recent quarterly outlook: prospects for the economy during the fourth quarter of 2020 and beyond mid-year 2021 look firm, but the path in between those periods remains incredibly murky and fraught with danger. That view stems from our steadfast maxim that the pandemic is the recession. And the worsening pandemic has undoubtedly created a drag on growth. Although we forecasted this, the labor market data provided the clearest signal yet that risks to the downside are intensifying. 

Net job change for November totaled roughly 245,000. The lowest figure since the labor market began recovering in May, it fell well below expectations and the approximately 610,000 net new jobs created in October. And it leaves total employment roughly 9.8 million jobs below the peak level from February. Beyond the loss of momentum, the underlying data also set off some alarms. After declining in October, permanent job loss increased once again in November, largely reverting to the level from September. Also, the number of people completing temporary employment continued to increase over time, increasing the risk that they cannot obtain further employment. Meanwhile, the labor participation rate declined again; the pattern in recent months demonstrates that the recovery has clearly stalled. And within overall net job gains, job losses continued to occur in several notable industries, most prominently government and retail trade.

Labor participation recovery stalled

Not the only sign of trouble

Other data released last week also presented some signs of trouble. Weekly initial unemployment claims declined slightly but remained elevated, signifying a loss of momentum.  Additionally, the number of people exhausting their unemployment benefits continued to increase, reflective of ongoing labor market damage. Both the ISM manufacturing and non-manufacturing indexes for November also declined. Although they both remained above 50, signaling economic expansion, the declines show that businesses feel that momentum is slowing. 

A new hope for stimulus

Last week also brought a ray of hope for fiscal stimulus. After stalling out for months, progress toward an agreement gathered steam. Both sides seemed to home in on an agreement totaling roughly $908 billion. Major components include:

• $288 billion for a continuation of the paycheck protection program (PPP) and other small business relief
• $180 billion for an extension of unemployment benefits through the end of March
• $160 billion in aid to state and local governments
• $82 billion in education relief
• $45 billion in airline and transport aid
• $35 billion in aid to healthcare providers
• $25 billion in renter assistance

Though smaller than amounts being discussed pre-election, a package of this size could help provide support between the end of this year and the middle of 2021 when widespread vaccinations should enable greater economic momentum. The stimulus package will likely get paired with a bill to fund the government beyond December 11 when the current funding resolution expires. We have consistently and apolitically emphasized the need for additional stimulus to support the economy until we move past the pandemic. Our base case forecast assumes a spending package of roughly $1 trillion, in line with this mooted package. Therefore, the passage of this would provide support for our base case trajectory and help guide the economy away from our downside case, which projects a secondary economic contraction in the first half of next year.

|  What we are watching this week  |

This week will present readings on inflation from both the consumer price index (CPI) and producer price index (PPI) for November. We expect only modest increases in headline inflation despite rising energy prices. Core inflation should also show little change. Demand in the economy continues to recover, but slowly and unevenly as economic growth decelerates, restraining inflationary pressures. We expect the first reading on consumer sentiment for December to show little change, with good news on the vaccine front likely offsetting bad news about the trajectory of the pandemic. 

|  What it means for CRE  |

For commercial real estate (CRE), even though some tough sledding lies ahead, the exact path forward depends to a large extent on the macroeconomy. Our proprietary scenario analysis shows a meaningful divergence in performance across scenarios. In some instances, the rift in performance between the upside and downside cases looks substantial, particularly for higher-beta markets. If the economy can avoid the downside scenario, the CRE market should avoid the largest projected declines in rents and largest projected increases in vacancy rates. While all markets should benefit from this, higher-beta markets have the most to gain from avoiding the bleakest macro scenarios. 

|  Thought of the week  |

Money supply continues to increase while the velocity of money declines, indicating that individuals are holding cash and not spending it.