Solid US Employment, Retail Sales Growth Bode Well for Continued “Slower but Steady’ Economic Expansion
Aug 17, 2017 – CoStar News
Tuesday’s Commerce Department report of a major boost in U.S. retail sales in July, combined with a stronger-than-expected jobs report earlier this month, suggests that the U.S. economy continued its slow but steady expansion in the third quarter.
Usually, record highs in the stock market, strong economic indicators and stable fundamentals across U.S property and capital markets would be cause for investors to plunge headlong into the property market. However, political and macroeconomic uncertainty is generally causing CRE investors to pull back from riskier opportunities amid elevated pricing and limited opportunities to deploy capital.
The U.S. added a higher-than-expected 209,000 jobs in July, posted a record 83rd consecutive month of net jobs creation as the national unemployment rate fell to a 16-year low of 4.3%. Additionally, the Commerce Department on Tuesday reported that U.S. retail sales jumped 0.6% in July, the largest monthly increase in seven months, following an upwardly revised 0.3% increase in June as consumers ramped up discretionary spending and purchased more vehicles.
The recent volley of good economic data, while welcome, doesn’t change the base view of most economists and analysts surveyed by CoStar, who continue to forecast a gradual deceleration of growth in CRE markets and the broader economy over the next several quarters.
“The July employment report, along with the advance estimate of second-quarter GDP, suggests that the U.S. economy continues to chug along,” said John Affleck, CoStar director of analytics. “With hopes of a breakout year repeatedly dashed over the last eight years, these all-too-familiar figures of ‘two-point-something’ growth and 200,000 jobs is the new definition of success this cycle.”
Even as the U.S. economy continues to rumble along in the ninth year of expansion, prospects appear dim for getting a pro-growth agenda promised by Congressional Republicans and the Trump Administration on track amid political challenges they will face upon returning to Washington from their August recess, according to Beth Ann Bovino, chief economist for S&P Global.
Despite those hurdles, Bovino expects the U.S. expansion to last into 2018, albeit at a modest pace, forecasting GDP growth of 2.2% this year and 2.3% in 2018 as the labor market continues to strengthen and the Federal Reserve seems likely to only lightly tap the brakes on interest rates.
Affleck and other economists cautioned against reading too much into the monthly job numbers from the U.S. Bureau of Labor Statistics, which are volatile and subject to substantial revisions each March.
Deceleration in CRE, Economy Still Likely
Despite the string of consistently solid numbers, analysts continue to see a forward trend of weakening commercial property rent growth across many markets and property types, as well as declining sales and leasing volume.
“That’s not to say it isn’t positive news, but we have plenty of reasons to believe that growth should decelerate moving forward,” noted CoStar Portfolio Strategy managing consultant Paul Leonard.
The tight labor market suggested by the monthly employment payroll survey is exacerbated by U.S. population growth that’s as low as it has been since World War II, as well as an expected contraction in immigration levels in the current political environment, CoStar Portfolio Strategy Managing Director Hans Nordby said.
“The flip side is that unemployment that’s this low should drive better wage growth. With inflation sub-2%, real wage growth even now compares favorably to the peak years of the last economic cycle,” Nordby added.
Steady employment growth and a renewed surge in corporate profits continued to fuel a healthy U.S. office market in the second quarter. After several quarters of decline during 2015 and 2016, U.S. corporate profits have now increased for four straight quarters, with earnings reported by S&P 500 companies rising an average 10% in the second quarter.
“Companies that make money (will) hire people, and that powers the office market,” Nordby said during CoStar’s recent midyear office review and forecast. “Historically, the U.S. never goes into a recession when we’ve got two or three quarters of positive corporate growth. That bodes very well for the economy for the next year.”
Significantly, the jobless rate for college-educated people age 25 and older, the most employable Americans, held steady at a jaw dropping 2.4% last month, well below the 4% at the height of the last cycle in 2007.
“This very tight employment rate for college-educated employees is probably the number-one reason for the flight to quality within the office market,” said Walter Page, CoStar director of office research, noting the current trend of occupiers to trade up for newer, high-quality space.
What Will the Fed Do?
Christine Cooper, regional economist for CoStar Portfolio Strategy, noted that the muted labor force participation rate at midyear may provide some slack in the labor market, which could account for why wage growth remains tepid.
While the July employment data revealed some concerns in the July data, including the significant proportion of lower-wage jobs and relatively small 2.5% increase in average hourly earnings, the report captures a U.S. economy that’s still in growth mode, according to a capital markets update by Steven A. Kohn and Christopher T. Moyer, leaders in Cushman & Wakefield’s Equity, Debt & Structured Finance group.
“The economy continues to be moving in a positive direction, albeit at a slow and steady pace as it has been for the last seven years, which should translate into ongoing improving fundamentals across all property types,” Moyer and Kohn said.
Beth Ann Bovino, chief economist for S&P Global, said July’s employment report suggests good momentum for the economy and continued strength in labor demand, giving the Federal Reserve Bank room to breath after it announces its balance sheet normalization plan in September.
However, the Fed will likely hold off on raising rates this year due to the subdued wage gains along with consumer price inflation that has slipped since its February peak, Bovino added.
“The stronger-than-expected 209,000 job gains in July, after healthy upwardly revised job gains in June will add to the Fed’s belief that the labor market is on solid ground,” Bovino said.