Hope. Perhaps.

Quick takes:

• Number of open jobs declines
• Net job gains slow
• ISM indexes decline
• Interest rate impacts being felt?
• CRE watching closely

The economy remains in a strange place when news and data normally deemed negative could get perceived as a positive. And that rang true (to an extent) last week with some key labor market data releases. What should we make of recent developments in the labor market? A hopeful sign or a pyrrhic victory?

Labor days

Last week some data hinted that the labor market might finally be loosening a bit. First, the Job Openings and Labor Turnover Survey (JOLTS) data showed some signs of tentative slowing. The number of open jobs declined considerably in August, falling by roughly 10% to 10.1 million, down from a record 11.9 million open jobs in March. That represented the lowest level since June 2021 and dropped the job openings rate to 6.2%, down from a record high of 7.3% in March. Additionally, the hires rate, turnover rate and quits rate all continued their slow declines from earlier this year. The ratio of unemployed persons per job opening declined 1.7, the lowest level since November of 2021.

Second, the employment situation for September also showed tentative signs of slowing. Net job gains totaled roughly 263,000, the lowest level since April 2021 and more in line with pre-pandemic job creation levels. Year-over-year wage growth remained elevated at 5% but continued to slow since peaking in March at 5.6%. Although the unemployment rate ticked down to 3.5%, its half-century low, it did so largely because the labor participation rate slipped slightly. Lastly, weekly unemployment claims rose more than expected after falling below 200,000 during the previous week.

Net Job Gains In Context

Bad news = good news?

In usual times, we would view these developments as concerning. Yet, these remain far from usual times. With the labor remaining so tight and demand partially contributing to inflation, we can put a positive spin on these changes. Does this weakening in the labor market mean that the Fed’s rate hikes are working? Could a weaker labor market mean less contribution toward inflation and less of a risk of a recession? The Fed certainly hopes so. It would like to see better balance between labor supply and demand which could reduce demand-driven inflation and require less monetary tightening. But these developments seem to raise more questions than they answer. Namely, (1) is the Fed giving these rate hikes long enough to work before hiking and (2) is the Fed going too far? Obviously, those two questions connect to each other. Right now, the answer to the first question remains unclear. With the Fed seemingly so focused on year-over-year inflation (“data dependent”), it does not appear likely to wait and see if its relatively large hikes are having an impact before enacting the next hike. While that doesn’t answer the second question, these hikes certainly raise the probability that the Fed overshoots and goes too far, risking a downturn in the economy. 

|  What else happened last week  |

Both the ISM Manufacturing and Services indexes declined in September, but both remain above 50, indicating economic expansion. The services sector remains in a stronger position than the manufacturing sector. Construction spending for August declined, coming in weaker than anticipated, following a decline in July. Construction spending appears to be slowing amid higher interest rates. 

|  What we are watching this week  |

Inflation takes center stage again this week. September’s consumer price index (CPI) data should show monthly increases for both the headline and core indexes with the headline index likely to slow slightly on a year-over-year basis while the core index looks likely to increase on a year-over-year basis. The producer price index (PPI) for final demand for September should increase slightly while import prices should decrease due to falling energy prices. Retail sales for September should show continued strength on the part of the consumer which should support GDP growth during the third quarter. Lastly, we expect little change in consumer sentiment during early October. 

|  What it means for CRE  |

Much like the economy, the commercial real estate (CRE) market would typically view a slowing labor market as an unwelcome, worrisome development. Yet, as an interest-rate-sensitive asset class, CRE is also feeling some pressure from higher interest rates. That makes current developments more ambivalent if not overtly positive. Yet, the economy and CRE market are walking a fine line here. Some weakening in the labor market could certainly help with the demand-driven component of inflation, which could result in less monetary tightening and a lower risk of recession and CRE market disruption. But market participants should be careful what they wish for. Too much weakening in the labor market could produce a recession and corresponding damage to the CRE market. The Fed is walking a fine line and the economy and the CRE market are going along for the ride, for better or worse. 

|  Thought of the week  |

Mortgage rates continue to increase significantly in recent periods, with the average rate on a 30-year fixed mortgage rising by roughly 400 basis points in the last year.