Some market watchers felt the August jobs report, released last Friday, was relatively positive, while others felt it was lousy and well below what is needed to give our economy a shot in the arm. For those of us in the commercial real estate market, the report was mediocre enough to be just about what we wanted to see. Here’s why:
Without enough tangible traction in the economy to impact underlying commercial real estate fundamentals (which has been the case throughout the sluggish recovery), the most important determinant of how our market will perform is the rate of growth in interest rates. Notice I didn’t write “the direction of interest rates” as it is clear that they will be going up. For us, it is the magnitude of the increases and the rate at which they rise. Friday’s jobs report was mediocre enough to allow rates to rise but not substantially.
The Bureau of Labor Statistics reported that in August 169,000 net jobs were created, well below the consensus estimates of about 200,000. This number, and the entire report, has both positive and negative implications.
On the positive side, it is another month in which jobs grew in the private sector. Average hourly earnings and hours worked both increased after dropping in July. Additionally, the unemployment rate (which, as regular Concrete Thoughts readers know, I believe is a useless number) dropped to 7.3 percent from 7.4 percent the month before.
However, the 169,000 figure was disappointing given some particularly positive news on other economic fronts, which led economists to predict a much larger figure. For example, the manufacturing and service sectors are expanding, the housing market is improving, auto sales have exceeded their prerecession levels, and exports continue to be strong, notwithstanding weak growth overseas. Additionally, consumer confidence and consumer spending are strong, reinforcing the fact that all of the hubbub over the sequester cuts turned out to be nothing more than political rhetoric.
What makes the August jobs report even more distressing is that revisions to already weak jobs numbers in June and July were revised lower by 16,000 and 58,000, respectively. These adjustments are the results of phantom jobs the government assumed were created using their birth/death model for companies they assumed were formed. In fact, this model accounted for 90,000 of the 169,000 August jobs (look for that number to be revised downward in the next month or two). The absolute number of jobs created is what is most important, and it is generally accepted that we need 200,000 to 250,000 jobs created per month just to keep up with population growth.
Of the jobs that were created in August, a disproportionate share was in the lower wage sectors of restaurants and retail.
In total, the number of jobs in the U.S. remains about 2 million below the number we had before the recession. At the current rate of job creation, adjusting for population growth, it will take more than eight years to get back to prerecession levels.
More alarming is that the participation rate (the percentage of Americans 16 years of age or older who are employed) fell to its lowest level in modern times at 63.2 percent, lower than the paltry 63.4 percent rate achieved during 1978’s stagflation under Jimmy Carter. In fact, August was the 40th consecutive month in which discouraged unemployed workers dropped out of the workforce in greater numbers than those that found jobs. The BLS reports that today there are 90 million Americans eligible for work who are not working.
So the report was good enough to likely encourage the Fed to begin scaling back its bond-buying program but bad enough that the reductions should be mild. This incremental approach should force interest rates to rise but, we are hopeful, only moderately. Just talk of the Fed’s tapering has forced the 10-year treasury to climb, from a low of 1.6 percent in May, to approximately 3 percent at the time of this writing.
Thus far, the increases in rates have not tangibly impacted the investment sales market, but, as rates continue to rise, the negative impact on market dynamics is inevitable. The Fed must, at some point, exit its easy-money policy. The more incremental the reduction in purchasing bonds is, the less severe the impact on our market. Low rates have been addictive, and the pace of increases will determine how painful the symptoms of withdrawal will be.