The remarkable labor market

Quick takes:

• Net job gains catching fire
• Labor shortage fueling hot wage gains
• Consumer confidence starting to swelter
• Fed minutes suggest economy heating up
• CRE basks in the warmth of labor market gains

The U.S. labor market produced some remarkable results across several dimensions during the last few months. Interestingly and sometimes confusingly, some of these dimensions seem contradictory. Yet, delving into the data we find a labor market exhibiting strength, challenges and opportunities that connect in important ways.

Solid improvement in employment situation

July’s employment situation release displayed solid improvement, not just in July but during May and June as well. Payroll employment increased by 943,000 net jobs in June, meaningfully ahead of expectations and the largest figure since last August. Moreover, the restatement of the prior two months (after more thorough data) added an additional 119,000 jobs. With the restatement, the data increasingly shows momentum in employment reaccelerating after slowing late 2020 and early 2021. The 3-month rolling average of employment change (which smooths out some month-to-month randomness) has accelerated for the sixth consecutive month. Total employment now stands roughly 5.7 million jobs below pre-pandemic levels, a significant improvement from last April when employment stood 22.4 million below the peak. While some have noted that July’s employment figure benefited from seasonal adjustments, even net of those adjustments the employment gain appears solid and reflective of a positive underlying trend. The delta variant presents some risk in the coming months, but job growth should nonetheless persist. 

Employment reaccelerating

Unemployment rates reflect this positive dynamic. Since reaching a record-high of 14.8% back in April 2020, the headline unemployment rate continues to decline, reaching 5.4% in July, the lowest level since March 2020, when the pandemic began wreaking havoc in the economy. The broader U-6 unemployment/underemployment rate follows a similar pattern – reaching a record high of 22.9% in April 2020 and thereafter steadily falling to 9.2% in July. 

Labor Demand > Labor Supply

Remarkably, this improvement occurred while the persistent labor shortage in the U.S. got worse. Prior to the pandemic, open jobs stood just above 7 million. Although that figure represented a decline from the record high of 7.6 million in November 2018, it nonetheless remained elevated despite total employment reaching a record high in February 2020. During the initial stages of the pandemic, the number of open jobs plummeted, falling to 4.6 million in April 2020. Yet just as quickly open jobs returned as the economy reopened during last spring. After seemingly reaching a plateau during most of 2020, the number of open jobs once again started rising as vaccination increased and the economy began to reopen. Through June 2021 (the most recent data available) the number of open jobs stands at 10.1 million, a new record. To put that number into context, it represents a staggering 7% of total employment from July. That raises the obvious question: with employment recovering at a solid pace how can open jobs continue to hit record levels? Simply put, because labor demand is growing faster than labor supply. While we intend to deeply explore the supply situation in the future, we emphasize that the supply shortfall has both cyclical and structural components. In the short-term some of the cyclical pressures should abate – the expiration of temporary unemployment benefits, continued vaccination, and the return of children to in-person schooling. Yet even once we move past cyclical factors the structural ones will remain. In fact, the structural issues will increasingly play a larger role in the labor shortage: Baby Boomer retirements, a declining birth rate, and slowing immigration mean no panacea exists to balance supply and demand quickly or easily in the labor market.

This demand-supply imbalance ultimately presents an excess demand situation across almost the entire labor market – across industries, across geographies, and across skill levels. Consequently, wage growth is accelerating. In the initial stages of the crisis, selection bias skewed average hourly earnings data – mainly low-wage jobs became eliminated, artificially boosted average earnings. As many of those jobs returned last year, wage growth data began to normalize. While employment still has not fully returned to its pre-pandemic peak, the trend in wage growth is becoming clearer over time. In this case it proves instructive to compare the current situation versus the pre-pandemic situation. During the last business cycle, year-over-year wage growth had trended upward, settling into a range of 3% to 3.5% as the pandemic neared. In recent months, with the labor market normalizing, year-over-year wage growth is trending above that pre-pandemic range, near 4%. Even with some temporary easing of labor supply pressures, the shortage should likely cause wage growth to further accelerate over time, even accounting for any potential short-run fluctuations. 

What else happened last week

The ISM Manufacturing and Services indexes for July both continued to show ongoing momentum in the economy. The Manufacturing index declined slightly, remaining well within expansion territory, but also likely indicating that the manufacturing sector moved past its peak. Meanwhile the services index reached a record high, indicating a recovery in the sector that continues amid ongoing vaccination and reopening of the economy.

What we are watching this week

Inflation will once again take center stage this week. Both the headline and core consumer price index (CPI) for July should show prices increasing, but at a decelerating rate relative to June. Similarly, the headline producer price index (PPI) for July should show pricing pressures building at a decelerating rate. 

What it means for CRE

For commercial real estate (CRE) the labor shortage represents missed opportunities. An estimated 7% more employment would translate into a bigger economy and more demand for all property types. If the labor market can close this gap it would mean more workers occupying office space, more consumers purchasing goods in retail centers, more goods  stored in industrial buildings, more people renting apartments, and more leisure and business travelers staying in hotels. In short, anything that alleviates the labor shortage would ultimately translate into more demand for space in all types of CRE. 

Thought of the week

The $1.2 trillion bipartisan infrastructure bill should pass the Senate this week, bringing infrastructure investment one step closer to reality.