Biggest threat: Labor shortage?

Quick takes:

• Labor shortage reaches a new record
• Labor supply cannot keep pace with demand
• Openings exceeding job growth
• More signs of inflation moderating
• CRE would benefit from filling open jobs

In 2018 we produced an in-depth look at the labor shortage in the U.S. At that time, we made a bold prediction: the labor shortage would get worse before it got better. We were more correct than we could have imagined, with job openings continuing to hit new records during the last three years, even with the pandemic. We will save new predictions for our updated labor shortage paper, due out in the fourth quarter. But for now, we wanted address a key question: how much risk does the labor shortage pose to the  overall economy?

Bigger threat than Delta?

Last week we addressed the threat posed to the economy by the Delta variant. Therefore, it feels appropriate to discuss the other big threat to the economy this week. While Delta is producing some short-term damage, it appears limited, more likely delaying economic activity than destroying it. But the labor shortage poses a different challenge. As of July, the number of job openings stood at roughly 10.9 million, up 749,000 jobs versus June. Openings increased for the fifth consecutive month and now represent 7.4% of total employment. The data continue to show the pervasive nature of the labor shortage. With some variation, the shortage exists across industries, skills and geographies. Moreover, open jobs continue to increase despite ongoing increases in total employment. Why? Though an oversimplification, labor demand is increasing faster than labor supply.

While the rise in labor demand certainly produces some positive impact, especially for workers via opportunity and wage growth, it also produces some risk for the economy -- not the risk of a recession, but the risk that the economy expands at a slower pace than it otherwise could. And the depth of the shortage hints that this reduction in growth could persist well into the future. Since January 2011 the labor market has created roughly 129,000 net new jobs per month. At that rate, assuming no new job openings, it would take just over seven years to fill all currently open positions. That contrasts with the impact from the Delta variant, which should likely prove temporary. Does that explicitly make the labor shortage a bigger threat to the economy than the Delta variant? Likely not in the short run, but in the medium to long run, absolutely. A labor shortage restricts aggregate supply in the economy, reducing the size of GDP relative to potential. That means fewer good and services, potentially lower standards of living, etc. 

Open jobs growing faster than employment

Producer inflation following suit

Data from the producer price index (PPI) for August showed producer inflation behaving similarly to consumer inflation. Headline PPI continued to increase at a brisk pace but appears to be moderating. Monthly headline inflation is inconsistently slowing. Meanwhile core PPI grew at its slowest rate in nine months. While pricing pressures continue to build, the rate of increase is easing, much as we anticipated. This mirrors what occurred in the major consumer-inflation indexes: continued pressure on prices, but generally lessening over time. While supply-side issues should continue to put some upward pressure on prices, we expect that the resolution of supply-side problems, coupled with the release of pent-up demand, should ease inflationary pressures over the next year, even as inflation remains elevated relative to pre-pandemic levels. 

|  What we are watching this week  |

The head and core consumer price index (CPI) for August should show that prices are continuing to increase, but that the rate of increase is moderating over time. We expect something similar for import prices, with little change in August, but the year-over-year rate slowing notably. Headline retail sales likely declined in August due to declines in auto purchases, with inventory still limited, as well declines in services that require high interaction with other people. The Delta variant has clearly scared many consumers away from activities such as dining/drinking out and travel. Lastly, we anticipate that preliminary consumer sentiment for September should increase slightly following August’s decline. The Delta variant continues to weigh on consumers’ spirits.

|  What it means for CRE  |

For commercial real estate (CRE) the labor shortage presents an intractable problem. On the demand side of the ledger, more people at work translates into direct and indirect demand for commercial space of virtually all types across many geographies. On the supply side, labor shortages continue to create both staffing issues and wage pressures across many roles and specializations within the industry. Users and managers of space are budgeting for greater labor costs in the coming years, particularly since many occupations related to commercial buildings skew older. Without a pipeline or succession program, retirements due to COVID (sometimes unplanned) will place even more pressure on staffing and costs. 

|  Thought of the week  |

Consumer credit card balances increased to $787 billion in the second quarter of 2021 but remain well below the record set in the fourth quarter of 2019 when balances reached $927 billion.