Powering through!

Quick takes:

• Despite challenges, economy powering through
• Job gains exceed expectations in February
• ISM Indexes reflect robust expansion
• Productivity growth surges
• CRE still well suited for current environment

Despite all the daunting challenges the U.S. economy still faces, it is powering through. Through the pandemic. Through inflation. Through the labor and input shortages. Through supply disruptions. Through geopolitical disturbances. While the economy remains far from perfect, it continues to push forward. The events of the last two weeks only serve to complicate the difficulties and increase uncertainties, but thus far the resilience of the economy has proven its mettle.

A fine February, thus far

After posting better-than-expected performance in January, thus far the data for February is showing continued strong performance. The labor market’s impressive recovery continued, with a net gain of roughly 678,000 jobs, the highest figure since July. Revisions to the prior two months added another 92,000 net new jobs to payrolls. Gains occurred broadly across industries. The labor market has now recovered 98.6% of the jobs lost during the downturn, a deficit of 2.1 million. Yet that entirely stems from deficits in a few industries: education and health services, leisure and hospitality, and government maintain a deficit of 2.7 million jobs. Meanwhile, employment in all other industries now exceeds pre-pandemic peak by roughly 600,000 jobs. Rather quietly, key industries for commercial real estate (CRE) are faring well. Total employment for the construction, warehousing/storage, information, and professional and business services industries now exceeds pre-pandemic peak by roughly 1 million jobs. 
 

Beyond jobs numbers, other metrics also reflect a strong labor market. The unemployment rate continues to tick downward, reaching 3.8%. As we have previously discussed, a tight labor market creates incentives for people to return to the labor force. The labor force participation rate continues to drift higher, led by prime-age workers.  Wage growth slowed in February but remains robust and below inflation. While that means real wage growth is negative, it also means that the risk of a wage-price spiral seems unlikely for now with longer-term inflation expectations remaining steady. Moreover, weekly initial unemployment claims continue to hover near low levels while continuing claims continue to decrease.

Labor force participation rates rising
 

ISMpressive

Beyond the labor market data other metrics also reflect the strength of the economy. The ISM Manufacturing Index for February increased, with the manufacturing sector performing well for the 21st consecutive month despite all the supply-side challenges. Meanwhile, the ISM Services index for February declined slightly likely due to ongoing supply-chain issues and labor shortages. Yet the index still reflects expansion in this sector. Taken together, the two indexes show an economy growing briskly despite the numerous challenges. 

|  What else happened last week  |

Productivity growth in the fourth quarter surged after a disappointing third quarter. We continue to project an improvement in productivity during the current expansion versus the previous expansion. Chair Powell testified before Congress and reiterated the need to raise rates to help tamp down inflation. He more or less telegraphed that the Fed will hike 25 basis points this quarter, in line with our expectations, but he left larger rate hikes on the table for later periods. 

|  What we are watching this week  |

The consumer price index (CPI) for February should show further increases. The headline CPI should head toward 8% on a year-over-year basis while the core CPI should head toward 6.5% year over year. Preliminary consumer sentient for March likely fell due to the Ukrainian crisis but that has not impeded consumer spending. We expect the number of open jobs to remain near their record high, hovering around 11 million, reflecting the structural nature of the labor shortage. 

|  What it means for CRE  |

The inflation data this week will almost certainly generate a lot of noise, especially against the backdrop of current geopolitical events. But the signal in the data reminds us that CRE remains well positioned to tackle inflation. After two to three decades of relatively benign inflation, many in the market continue to overlook the ability of CRE to address inflation, even imperfectly. We continue to affirm that the biggest risk to CRE remains a downturn in the economy. While recent geopolitical events and their impact on prices (notably energy) increase risk
 

Wage growth remains robust amidst ongoing excess labor demand which is causing workers to return to the labor force. Meanwhile consumers still hold roughly $2.5 trillion in excess savings. Moreover, the U.S. remains a domestically oriented economy with the ability to increase domestic oil production if necessary. That would help to blunt the impact from rising energy prices and support GDP in the process. Therefore, we are not yet altering our base case: the economy should continue to power through with robust growth and ultimately decelerating inflation in 2022, even though short-run inflation should remain elevated. But the downside risks are increasing with the current geopolitical situation remaining highly uncertain. 

|  Thought of the week  |

Despite dour headlines, housing starts in the U.S. in 2021 reached their highest calendar-year total since 2006 during the housing bubble.