Why the Rosier Employment Report Still Falls Short
U.S. employers added 192,000 jobs in February, the largest one-month improvement since May 2010, when public hiring picked up temporarily on account of the need for census workers. The increase in payrolls reflects a decline of 30,000 jobs in state and local government jobs, more than offset by a net gain of 222,000 on private-sector payrolls.
These headline gains, while welcome, have mixed implications for commercial real estate; improvements remain uneven, with employment in areas such as financial and retail services lagging gains in education, health care and administrative and temporary services. Across industries and occupations, earnings and salaries are only just outpacing inflation.
While underlying improvements in the economic outlook suggest an acceleration of payroll gains in 2011, headwinds from domestic policy uncertainty and from global macroeconomic and geopolitical instability are weighing on firm hiring decisions.
Creating Jobs, but Not Fast Enough
Employers have a long way to go in replacing the 8.7 million jobs lost in 2008 and 2009. Since January 2010, employment has increased by just 1.2 million jobs, measuring the slowest progress in the labor market’s recovery following any post-World War II recession.
For most of the past year, the absence of robust payroll growth has followed from slack in the utilization of currently employed workers and strong gains in productivity. In recent economic history, these are typical features of a recovery in the labor market that lags the broader economy’s emergence from recession.
But exacerbating the expected lag in payroll gains, businesses have been navigating a more complicated route in the current recovery, managing uncertainties around the regulatory and policy environment and, more recently, an increasing incidence of mismatch in required skill sets and the skills present in the unemployed labor pool.
Job openings remain extremely low by any historic norm, but have been increasing in recent months. In many of the sectors that are most crucial for a recovery in spending and direct space demand, hiring has not kept pace.
Where the Jobs Are
Clear trends are emerging in some segments of the labor force, often reflecting broader macroeconomic, fiscal and demographic trends that are driving the demand side of the employment equation. The trends are not always positive.
Consistent with the enormous budgetary challenges facing many state and local governments, public payrolls declined in February. Federal payrolls were unchanged over the month, with a decline in postal service jobs offset by an increase in non-postal federal workers. State employment declined by 12,000 jobs; local government employment by 18,000. While these losses may not bear directly on demand for office space, public payrolls remain a key component of overall employment across virtually every metro area, including New York City.
Outside of public payrolls, gains were reported for both goods and services employment. Non-residential construction employment extended its downward trend, falling by 2,000 jobs in February. But non-residential specialty-trade-contractor employment increased by almost 17,000 jobs and is now slightly higher than a year ago.
In the service sector, retail employment fell by 8,100 jobs in February. Losses were reported at furniture and home furnishing stores, electronics stores, building material and home improvement stores and department stores, among other categories.
Professional and business services employment increased by 47,000 jobs in February. Management and technical functions reported increases, but the gains were concentrated in administrative and temporary services, which accounted for more than 36,000 net new jobs.
In areas that are more directly relevant for prime office-space demand, the results have been consistently disappointing. Information services reported no increase in jobs in February. In the financial services sector, employment fell by 2,000 jobs over the month; and this sector has almost 50,000 fewer jobs than a year earlier. While many financial institutions have reported robust recoveries in profit levels, these gains have yet to translate into an observable improvement in the sector’s overall employment levels.
Headwinds to Job Growth
All things being equal, the most recent data on the performance of the economy and business sentiment suggest that hiring should accelerate modestly over the course of 2011. The consensus estimates suggest that payrolls at midyear may be expanding at a fast enough pace to offset new entrants to the labor force, reining in broader measures of unemployment.
But headwinds to the baseline outlook remain pervasive. Apart from policy uncertainty and concerns about how monetary interventions will ultimately give way to a tightening bias, ongoing disruptions to global geopolitical and macroeconomic stability are constraining businesses that might otherwise move full force in growing their payrolls. The recent unrest in the Middle East and its impact on oil prices have served to reemphasize the need for deliberate hiring and capital investment choices amid a recovery that remains fragile even as it appears to accelerate.
As a result, property investors with heady expectations for job growth and space absorption must contend with the real possibility that stresses on cash flow could increase before they abate.
Sam Chandan, Ph.D., is global chief economist of Real Capital Analytics and an adjunct professor at the Wharton School.