Bringing the Latest Jobs Numbers Into Focus
For millions of unemployed Americans, for policy makers, and for commercial real estate investors and lenders, last Friday’s employment report offered a rude aide memoire of the recovery’s continuing unevenness. According to the Bureau of Labor Statistics’ advance estimate, private and public employers added just 36,000 net new jobs in January.
This tally fell alarmingly short of projections, already revised lower and qualified on account of drags from bad weather. And while many economists and market strategists will dismiss the report outright, the findings reinforce the need for a cautionary note with regard to the broad outlook for property fundamentals.
Conceding that weather weighed on the results, the latest jobs report is still consistent with other recent data that shows firms remain resistant to hiring, even as corporate profits climb and consumer spending shows signs of picking up. In part, firms’ current reluctance reflects that constrained hiring has been a key to their success in reengineering their bottom lines over the past two years. Specifically, tight controls on labor costs have been instrumental in driving profits.
While revenue growth may be preferred to cost cutting, many firms have yet to observe demand that would justify the commitment to payroll expansion, considering that productivity gains are still robust. The result has been that, measured in terms of absolute job openings, the labor market is only as healthy now as it was at its worst point following the 2001 recession.
In fact, the current labor market recovery is the most anemic in generations. Of the 8.8 million jobs lost during the downturn, only 1 million have been recovered thus far. A majority of that improvement occurred in the first half of 2010. Since June of last year, employers have added just 284,000 jobs, with relatively stronger private-sector increases offset by declining public payrolls.
And so, 36 months after the January 2008 peak in employment, the labor market remains almost 6 percent below its last high. In contrast, in all but one other post-World War II recession, employment had fully recovered within 32 months of its initial inflexion. Even in the case of the 2001 recession, which was followed by a recovery characterized at times as jobless, the labor market recovered substantially faster than the current trend.
Lower Unemployment Rate Misleading
Is there any positive news in the employment report? While labor market gains were lackluster, the national unemployment rate fell sharply in January, from 9.4 percent in December to 9 percent, its lowest since April 2009.
For commercial real estate investors, that decline must be taken in context, however. It resulted primarily from a drop in the size of the labor force and a commensurate decline in the labor participation rate, rather than from the measured increase in actual employment. In thinking about space demand, it is the latter measure of job creation that is relevant for absorption. And so this decline in the unemployment rate is largely immaterial for the sector.
As of January, there are 85.5 million Americans outside of the labor force, two million more than a year earlier. For the 13.9 million Americans who factor into the official count of unemployment, the mean duration of unemployment has increased over this period, from 30.5 weeks in January 2010 to 36.9 weeks in the newest tally. The near-term outlook is not particularly strong. As illustrated by the job opening statistics, offerings are improving but remain well below healthy levels.
Job Offerings Remain Sparse
Where jobs are being created, the headline measures necessarily mask variations across several dimensions that are of import for commercial real estate, including differences across geography and professions. Nationally, job creation in office-using employment and in commercial construction remains weak. And while New York City has outperformed the rest of the state in its recent jobs tally, financial services has not been a contributor to those outcomes.
Private Sector Growth Driving Gains
The private sector continues to outpace public payrolls. The net increase of 36,000 jobs for January reflects a private-sector increase of 50,000 jobs and a decline in public payrolls of 14,000. Most of the public decline is in local government offices. Significant private-sector gains were reported in auto manufacturing, clothing stores, administrative and waste services and health care.
Sharp Drop in Commercial Construction
Construction employment fell sharply, by 32,000 jobs. The decline may have been exaggerated by weather conditions. With that in mind, the drop in construction employment was also weighted toward large losses in non-residential construction. Non-residential construction accounted for just over 28,000 lost jobs, the clear majority of the decline.
In areas related to office-using employment, trends remain mixed. Administrative services have been a growth area. But at the high-end, employment gains in areas including financial services are still weak. Financial activities employment fell by 10,000 jobs in January, bringing net losses in the industry to 60,000 jobs over the past year. In New York City, financial services have fared only slightly better, adding 6,500 jobs during 2010.
A Brighter Forward Look
Looking forward, employers are expected to drive modestly stronger payroll growth as private economic activity develops additional momentum. The most recent G.D.P. report suggests that the required economic underpinnings are in place for job gains to accelerate from their current levels. With conditions ripening for employment growth, the major constraints on hiring are lagging improvements in business confidence and a lack of visibility into policy and regulatory initiatives and implementation objectives.
Seizing upon the brighter outlook, the challenge for the commercial real estate sector is in assessing whether these job market improvements will come fast enough to warrant even higher property prices in the here and now.
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.