May Employment Solid but Concerns Remain

By Justin Dean

When released earlier this month, employment data for the month of May looked solid on the surface, but when examining the entirety of labor market metrics available there are many underlying indicators that should raise a few eyebrows.

First the positive news: as a whole the United States economy added 138,000 jobs in May according to the Bureau of Labor Statistic (BLS). This figure isn’t radical, but solid considering the unemployment rate has now remained at less than 5 percent for a year. With so little slack in the market, adding 200,000 plus jobs per month is simply not in the cards.

The unemployment rate dipped to 4.3 percent, the lowest it has been in 15 years, and the economy added more than two million jobs during the last 12 months. The labor market added jobs for a record 80 consecutive months. Resignations are increasing and layoffs are decreasing, according to the Job Openings and Labor Turnover Survey (JOLTS), implying the continuation of positive trends seen over the long run of the recovery. There is no perfect measure to gauge confidence in the labor market and economy, yet the fact that some workers feel comfortable enough with the health of the economy to quit their jobs is a positive sign for the multifamily industry. New employment often leads to increased income, which can drive rent increases and absorption for the new, high-end apartments that have been flooding the market in many cities across the country this year.

The Federal Reserve Bank of St. Louis’s Labor Market Condition Index (LMCI), which combines 19 different metrics to assess changes in the labor market, also contained mostly positive news as it reported 2.3 index points for the month.  The LMCI typically drops massively during a recession and is slightly positive during expansions. For example, the index hit a low of -43.5 points during the great recession and has averaged 3.9 during the extended recovery.

Participation and Wage Growth Should Moderate Optimism

Any optimism from these numbers can be tempered for a few reasons. First, although a healthy number of jobs were added in May, revisions to previous releases saw a combined decrease of 66,000 jobs from the March and April reports.

Secondly, the drop in the unemployment rate was driven more by a decrease in the size of the labor force than an increase in jobs. The labor force shrunk by 429,000 workers in May and the participation rate dropped 0.2 percent. Hopes that the participation rate may start to climb upward have been thwarted in recent months. Now, a number that hovers near 63 percent is seeming more and more like the new normal.

Some of this decrease in participation is driven by retiring Baby Boomers, but there are other factors that cause concern. Job openings continue to exceed job hires, a development that began in early 2015. Data for April, the most recent available, indicate that there were nearly one million more job openings than hires. This was previously unprecedented in the JOLTS data, which the BLS began compiling in 2000. Numbers like these suggest that the labor force may also be shrinking because workers do not have the right skills for the available jobs.

Lastly, while wages continued to grow in May, the growth has not been accelerating like many were anticipating this year. Wages ticked up 4 cents for the month and 63 cents for the year. This represents 2.5 percent growth in employee earnings, which is not a terrible figure, but wage growth has hovered around this number during the last 18 months. A year ago, many hoped that as the economy reached full employment, workers would be rewarded for lackluster wage growth during the recovery and the pre-recessionary range of 3 to 4 percent would return once again. That has simply not been the case and much like the lackluster participation rate, this could be the beginning of a new status quo in the labor market.

Metro Employment Trends Remain Unchanged

Likewise, when looking at more granular employment data, the good-but-not-great narrative continues to surface. May metro employment numbers show a consistent trend that has held for much of the last two years: metros in the “smile states” in the Southeast and West of the country robustly outperformed the job growth in Northeast and Midwestern metros.

Orlando finally lost its stranglehold on the top spot for job growth, falling to seventh, but Florida as a whole continued to dominate the top of the rankings placing seventh metros in the top 20. While Midwestern metros like Des Moines (2.8 percent year-over-year job growth), Kansas City (2.5 percent) and Detroit (2.3 percent) show some signs of strength, the South and West continue to outshine the rest of the country in rankings of employment growth.

A low unemployment rate and slowing job growth led Federal policy makers to conclude that the economy is at full employment and thus another rate hike was suitable. This increased the cost of short-term capital and further shrunk the spread between cap rates and interest rates. Without a comparable increase in the wage growth, demand for both multifamily and retail property types may suffer as workers won’t be able to afford new apartments or goods.