No Hoovervilles Here
The Bureau of Labor Statistics will release its accounting of March payrolls on April 2. The consensus anticipates that payrolls will rise by 190,000 jobs in March. If economists’ projections hold, the job market is poised to report its best result in exactly three years. Since the onset of its contraction in January 2008, the labor market has shed just over 8.4 million jobs. Payrolls fell by 36,000 jobs in February, and by 26,000 in January. A strong positive result for March will undoubtedly bolster confidence in the recovery. Firms’ and consumers’ willingness to invest and spend will generally track sentiment, improving in kind.
February payroll data for New York was released last week and shows that the state added just over 8,000 private-sector jobs over the month. New York City’s unemployment rate fell from 10.4 percent to 10.2 percent, but remains markedly higher than the state’s 8.8 percent.
Excluding New York City, the state’s unemployment rate is just 7.8 percent. The city has lost 92,000 jobs over the past year. While these losses are significantly narrower than had been anticipated in late 2008, sustained job growth remains elusive.
The statistical recovery remains fragile as long as we are not creating new jobs. Given our economy’s overwhelming dependence on consumer spending, current sources of growth–whether they’re related to federal government spending or a buildup in business inventories–cannot be sustained indefinitely unless consumers return to work and their incomes grow. Per capita personal incomes fell by 3.8 percent in New York State last year, constraining consumer demand.
Similarly, demand for space across the core commercial real estate sectors is also a function of current and projected employment trends. The connection is readily apparent in the office sector; one can easily intuit employment’s indirect relationship to apartment, retail and industrial space performance.
Economically meaningful and sustained job growth is not a certainty. Within the consensus projection, a number of economists anticipate that labor markets will remain weak for some time. In part, this downside expectation is based on an assessment of the extraordinary gains in worker productivity in recent quarters.
As described in the San Francisco Fed’s March Economic Letter, “In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate.”
Productivity growth has been elevated–even by the standards of a recessionary cycle–over the course of recent quarters, upsetting the empirical relationship between GDP and employment captured in Okun’s Law. Business-sector labor productivity increased by an annualized 6.9 percent in the fourth quarter; output increased by 7.6 percent, but hours worked increased by only 0.6 percent. Productivity gains were even larger in the third quarter. By extracting greater output from each employee, firms have been able to grow output without adding new jobs. Welcome under normal circumstances, productivity gains may delay the needed recovery in payrolls at this difficult juncture.
IN CONTRAST WITH the cautious macro outlook, the uptick in recent months in New York’s office leasing market anticipates some degree of job growth in office-using employment in 2010. It also reflects that job losses in the city were relatively fewer than anticipated in late 2008. The city’s Independent Budget Office reports that cumulative employment losses reached their nadir six quarters from the peak; cumulative losses totaled just fewer than 173,000 jobs.
In contrast with the current recession, the low point of the dot-com recession occurred 11 quarters into the downturn, with a cumulative decline of 229,000 jobs. Job losses during the 1989-to-1992 downturn played out over four years, with a total decline twice that of the current recession. The IBO sums it up thusly: “The Great Recession has been the worst economic crisis in 80 years. But in New York City, barring an unforeseen ‘double-dip,’ the current recession will go down as one of the mildest in terms of job losses since World War II.”
With the exception of the 1981 to 1983 downturn, the current recession’s job losses have been New York City’s mildest in post-War history. Still, it will take some time to replace the jobs we have lost. The IBO projects a three-and-a-half-year time frame for a return to the previous peak in employment, with payroll gains taking hold in the second quarter. According to the IBO, “this is broadly in line with the City’s experience in past recoveries.”
Barring any unexpected shocks, a report of payroll gains in March will portend a return to modest employment growth this year. Economists currently anticipate job growth on the order of 125,000 to 150,000 jobs per month over the next year. At that rate, the ranks of the unemployed will fall slowly.
In New York City, current trends suggest that the outlook is somewhat brighter.
Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.