Jobs Data Points to Higher Wages, Participation

By Justin Dean

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October’s national jobs report may have seemed uninspiring on the surface, but data released about metros in the subsequent weeks depict a slightly healthier image of the U.S. labor market, providing heartening signs for the commercial real estate industry.

Employment gains were middling for the second straight month in October, as the economy added 161,000 jobs and the unemployment rate stood still at 4.9 percent. The slowdown in job creation should be expected: As the unemployment rate hovers near what economists consider full employment, there will be less and less room for expansion of the labor market. What’s more, the longer the labor market sits near full employment, the less the total number of jobs added in a month will be as a measuring stick of employment health, because there are fewer people seeking to join the workforce.

Consequently, there are other measures of employment that must be examined to assess the state of the labor market. The first measure involves wage growth. Is the tightening labor market causing employers to compete for talent, bringing long-awaited pay raises to workers? Average hourly earnings increased 10 cents in October to $25.92, a 2.8 percent year-over-year increase.

An encouraging sign was that these gains were broad based, going both to workers in the highest-paying sectors, such as information (5.2 percent) and utilities (4.2 percent), as well as the lowest-paying sector, leisure and hospitality (4.6 percent). These wage increases should drive consumption growth just in time for the holiday season, which would in effect buoy the demand for retail spaces and continue to drive the need for facilities that fulfill online orders.

Another measure involves participation. Has the labor market improved enough to bring discouraged workers back into the labor force?  The labor force increased by slightly more than 2.6 million year-over-year, upping the participation rate by 30 basis points to 62.8 percent. Some, but not all, of this growth can be attributed to a population that has grown by nearly 2.8 million people since October 2015.

All three principal measures of labor underutilization continued their downward trend in October. U-4, which calculates the total unemployed plus discouraged workers, fell to 5.2 percent in October, down from 5.3 percent in September and 5.4 percent a year prior. U-5, which includes everything in U-4 plus those marginally attached to the labor force, fell to 5.9 percent, down from 6.0 percent in the prior month and 6.2 percent in October 2015. U-6, the broadest measure of unemployment, which includes U-5 plus all workers employed part time for economic reasons, followed a similar trend: down to 9.5 percent in the month, from 9.7 percent in September 2016 and 9.8 percent in October 2015. In conjunction with the wage increases, a growing labor force could drive demand for multifamily housing by increasing the number of household formations.

While modest wage growth and expansion of the labor force are welcome signs, some alternative indicators of labor market performance paint a more restrained picture. One metric of note is the Federal Reserve’s Labor Market Condition Index (LMCI), released on the first business day after the national jobs report. The LMCI typically drops massively during a recession and is slightly positive during expansions. For example, the index hit a low of -43.5 during the great recession and has averaged 4.0 during the extended recovery.

The index, which combines 19 different metrics to assess changes in the labor market, came in at 0.7 for the month of October and is currently averaging -1.0 for the year. As a result, the LMCI corroborates the initial reaction that many had to October’s jobs report: not terrible but not great either.

Jobless claims, on the other hand, offer a rosier view of the current labor market. The week ending Nov. 12 saw 235,000 Americans applying for unemployment benefits for the first time, the Department of Labor reported on Thursday. This is the lowest number of initial claims since November 1973. The four-week moving average, which some consider a better measure of labor market strength, was at 253,500, well below the 300,000 threshold that is considered to be the sign of a strong labor market.

Leading the charge in metro growth were markets in Florida, Michigan and Washington. When examining nonfarm year-over-year job growth in October, nine of the top 10 metros with a population over 250,000 were located in one of these three states, with Ogden-Clearfield, Utah, coming in at No. 9, being the only exception. Deltona-Daytona Beach-Ormond Beach, Fla., which had 5.1 percent percent growth year over year, led the pack.

Ann Arbor, Mich., came in second and was driven by continued growth in its government and services sectors, which should not come as a surprise for a city that houses the University of Michigan, one of the largest educational institutions in the country. Including the university, government employment accounts for more than a quarter of all workers in the Ann Arbor area. Student housing and retail should be the most robust sectors of commercial real estate in the area.

While most metros added jobs, year-over-year, the lowest metros for job growth were at or near zero for the month. Lexington-Fayette, Ky., and Oklahoma City were the worst performers in the month, with each losing -0.2 percent of their jobs since October 2015.

One notable metro that has consistently overperformed national employment growth during the recovery is Orlando, which had the fourth-highest growth in October among metros with populations larger than 250,000. The growth in this metro is driven primarily by its substantial leisure and hospitality sector, which employs nearly one in five workers in the metro and accounted for more than 30 percent of the growth over the past year. With so much of its economy dependent on tourism, the Orlando labor market is subject to more fluctuations than the national labor market as a whole. After losing 9.5 percent of its employment in one year during the recession in 2009, Orlando has increased nonfarm payrolls by 23.8 percent.

Orlando has seen decent supply growth in its multifamily units. Year-to-date, it has added 5,295 multifamily units, a number that represents 2.7 percent of stock, according to Yardi Matrix. Additionally, Orlando currently has 9,045 units in 34 properties under construction, which would increase the stock by 4.7 percent. The increase in multifamily stock may seem on its face to be able to absorb much of the demand from job growth in the area.

However, Orlando faces the same problem as many markets across the country: Nearly all of the new supply that has come online or is currently under construction is concentrated at the high end, leaving lower-income renters that have no other choice but to rent facing a tightening market and increasing rents. Of the more than 5,000 units that have been completed in 2016, all but 123 are classified as “Discretionary” or “Upper Mid-Range” by Yardi Matrix. These units typically are out of the price range of the metro’s many low-paying leisure and hospitality workers. And even the number of units under construction do not make the outlook for renters-by-necessity better. Of the more than 9,000 units under construction, 5,029 have yet to be rated by Yardi Matrix. Yet of those that have already been rated, only 614 units sit outside the high end.

This disparity is reflected in Orlando’s rent increases. Rents in the working-class Renter-by-Necessity group have grown faster than the upscale Lifestyle group for 12 straight months. Given the discrepancy in the distribution of new units, this is a trend that will likely continue.