Payrolls expanded by 216,000 jobs in March, according to last week’s report from the Bureau of Labor Statistics. Businesses easily offset cutbacks in local governments, as private employment increased by 230,000 jobs in March and, on a revised basis, 240,000 jobs in February.
Investors are understandably encouraged; the new counts mark the strongest monthly gains for the U.S. labor market since March 2006. Apart from its significance for the nation’s employment picture, the new data also suggest that American businesses have been relatively unshaken by the past month’s macroeconomic and geopolitical events.
In each of these respects, the labor market headline is both welcome and decidedly positive. Still, the gains must be qualified when assessing their implications for property markets and the risks to their sustainability.
Slow but Accelerating Gains
Businesses have added more than a half-million jobs to the economy in the first three months of this year. That compares favorably with last year, when private employers created fewer than 100,000 jobs per month on average.
Improvements on the order of the past two months’ gains would have been implausible a year earlier, given the fragility of the recovery and the drags on business confidence. While uncertainties related to policy developments remain significant, aggregate demand has been improving to a degree that is now fomenting an expansion of payrolls.
Aside from opacity around the business environment, productivity gains over the past two years have tempered the expansion of payrolls as demand has picked up. In the business sector, year-over-year output per hour increased by 6.6 percent in each of Q4 ’09 and Q1 ’10. Since then, however, productivity gains have slowed in each consecutive quarter, declining to just 1.8 percent in Q4 ’11. Nearly two years since the recession’s end, a stronger economic outlook has combined with these more moderate productivity gains to encourage more meaningful hiring.
Across Occupations, Uneven Gains
The headline employment trends beckon optimism, but there is still a ways to go. By most measures, we remain mired in the slowest jobs recovery in modern American history.
Of the 8.8 million private-sector jobs lost during the downturn, only one in five has been regained. Historically, we have returned to the previous employment peak within three years of the initial inflection. The unemployment rate, a crude measure of the labor market’s health, has fallen but may increase as a larger number of discouraged Americans re-enter the workforce.
Of particular concern for property investors, improvements in the labor market have been rather imbalanced. Significant payroll gains have been measured in some areas of durable-goods manufacturing, including the auto sector. In the service sectors, wholesale and retail trade employment has increased year-over-year, as has employment in transportation.
In professional and business services, gains have been concentrated in administrative support and temporary help services. Some of the largest and most consistent payroll increases over the course of the recession and the ensuing period have happened in the areas of health care and social services. Forty-five thousand jobs were added in these sectors in the past month alone, accounting for almost one in four net new jobs in March.
Unsurprisingly, local government payrolls are contracting as part of an adjustment that will take some time to be fully realized. Construction employment also remains weak. Across general and specialty trades, employment in residential construction continues to decline. Non-residential employment is rising slowly from its nadir, driven by a small uptick in current and planned multifamily housing development activity. Financial activities employment increased by 6,000 jobs in March, but has failed to show signs of consistent improvement, extending its decline on a year-over-year basis.
Important Qualifiers
Has the labor market reached a turning point, developing sufficient momentum across a broad enough swath of industries to propel higher absorption outside the apartment sector? There are still several reasons why property investors must remain circumspect.
Apart from anemic office-using trends, overall wage pressures remain weak, limiting growth in salary income even as broad price indices rise. Job openings remain subdued, even for this point in the cycle, and many unemployed Americans will face challenges in retooling for growth areas in the labor market. Business confidence is still sensitive to changing conditions in the domestic policy environment and the potential for new macroeconomic and geopolitical shocks. Instability in the Middle East and North Africa, a further deterioration in sovereign bond markets in Europe and spillover from economic disruptions in Japan all remain credible threats to sustained growth in the United States.
While recent developments have shown few signs of dampening the recovery, they have served to re-emphasize the need for deliberate hiring and capital investment choices amid a recovery that remains fragile even as it shows signs of accelerating.
As a result, the overall thesis holds: Property investors with heady expectations for job growth and space absorption must still contend with the possibility that stresses on cash flow may increase before they abate.
schandan@rcanalytics.com
Sam Chandan, Ph.D., is global chief economist of Real Capital Analytics and an adjunct professor at the Wharton School.
