The heat is on

Quick takes:

• Net job gains catching fire
• Labor shortage fueling hot wage gains
• Consumer confidence starting to swelter
• Fed minutes suggest economy heating up
• CRE basks in the warmth of labor market gains

As the calendar flipped from May to June, things in the U.S. started heating up. And while high temperatures garnered many of the heat-related headlines, the economy should not get overlooked. Across various measures, the economy also got hotter during the month, closing out what should be an incredibly strong quarter for economic growth.

Labor market getting warmer

The labor market outperformed expectations in June, creating roughly 850,000 net jobs, exceeding the consensus forecast.  Most of the gain occurred in two main categories. First, leisure and hospitality added approximately 343,000 net jobs, reflecting a recovery in jobs most negatively impacted by the downturn. Gains in (1) arts, entertainment, and recreation (2) accommodation and (3) food services and drinking places primarily reflect the return of demand for such services by consumers and the reopening of the economy. Second, government also added a net 188,000 jobs with all the gain coming from state and local government (federal government registered a net job loss). Revisions to previous months added another 15,000 net jobs to payrolls.

Yet, the pattern in gains reflects a dynamic that we have observed since the start of this crisis. While the largest job gains are occurring in the industries that generally lost the most jobs, the industries that held up the best (as measured by relative job loss) unsurprisingly continue to outperform over a broader time horizon. For example, despite continued large job gains in leisure and hospitality, employment as of June sits at only 87.1% of the pre-pandemic level. Meanwhile financial activities employment, despite much more tepid gains in recent months, now stands at 99.2% of pre-pandemic employment. We expect this trend to persist and over time - we anticipate that the hardest hit sectors will continue to have larger absolute gains and catch up a bit faster. Yet undoubtedly, because of permanent job losses (especially among the hardest-hit industries) and because of ongoing labor shortages, we expect the recovery across industries to remain inconsistent, even as the economy moves squarely into expansion territory. Other notable gains by industry occurred in professional and business services and retail trade. 

Gains in average hourly earnings also generally reflect a similar pattern. For example, on a year-over-year basis, average hourly earnings increased by 3.6% in June. But a wide variation by industry persists. For leisure and hospitality, hourly earnings increased by 7.1% year-over-year in June while for professional and business services it increased in line with the overall change. Wage gains in harder-hit industries are rebounding faster. That should slow over time, but for now, outsized wage gains should continue in industries with a relatively long way to get back to previous peak employment coupled with an ongoing labor shortage.

Consumer confidence percolating 

Consumer confidence also outperformed in June, significantly exceeding consensus expectations. Consumer confidence is getting boosted by the tight labor market, reduction in the pandemic/vaccination, and the ongoing reopening of the economy.  We expect consumers to remain in an optimistic mood which should continue to fuel spending over the coming months.  Consumers continue to sit on excess savings of nearly $2 trillion which they will likely deploy (at least partially) in the coming months. We continue to see the fastest economic growth rates of 2021 during the second and third quarters, driven largely by consumer spending.

What we are watching this week 

The ISM Services index for June should show a decline from its record-high level in May but remain at a level that signals robust economic expansion. Initial weekly jobless claims should continue their general downward trajectory. And the Fed minutes from the June meeting should show few surprises but reinforce the idea that the Fed is moving toward raising rates sooner than previously expected as the outlook brightened in recent months. 

What it means for CRE

Commercial real estate (CRE) should benefit from the recent improvements in the economic landscape. The overall labor market recovery bodes well for the economy and thus CRE, but the details prove encouraging. The ongoing relative outperformance of industries like financial activities and professional and business services in the labor market provide confidence that the office market is not imploding, even though the recovery still has room to run. We foresee continued growth in traditional office-using employment, which should help offset any potential negative impacts from changes to work-from-home policy or increased use of flexible space.  Yet this dynamic will likely further exacerbate the rift between have and have-not office properties that existed before the downturn, as employees will look to office space to provide things they cannot get at home or another non-office workspace. That should not only put a premium on newer properties, but should further incentivize office development, meaning any reduction to the supply side of the office market will likely come from older inventory, not an inordinate reduction in new construction activity in the future.  Retail and industrial should also find much to like in the data. Strengthening consumer confidence as well as employment gains in retail, trade and transportation and warehousing should portend a boost to demand for the space needed to store, distribute and sell goods as the returning consumer is a force to be reckoned with. And strong gains for accommodation employment reflect the resumption of travel, largely for leisure, but also increasingly for business. 

Thought of the week

In June, the share of employers raising compensation in the prior three months was the highest ever, at roughly 39%, according to the National Federation of Independent Business (NFIB).