Will the July Jobs Report Pressure the Fed to Act?
Multifamily investors and lenders could be coaxed off the sidelines if there is confidence interest rates will fall in September.
The July Jobs Report showed the highest rate of unemployment in nearly three years. July’s employment showed an increase of only 114,000 new jobs, the second lowest total of 2024. The previous year’s monthly average was approximately 215,000 new jobs.
This slowdown in July caused a 20-basis-point increase in the month-over-month unemployment rate to 4.3 percent. This is the highest unemployment rate since the end of the pandemic in October 2021. Almost half of the newly created jobs were in the health-care sector, while construction, hospitality and food service also saw sizable gains. Most sectors saw a downturn in employment. Some of the hardest hit sectors included: insurance, finance and information technology, and educational services. The overall count of the unemployed went up 352,000 to 7.2 million people.
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Many economists are talking about the Sahm recession indicator, named after noted economist Claudia Sahm. In 2019, Sahm showed how, since 1970 and without fail, a recession has begun when the three-month average of the U.S. unemployment rate is at least one half of a percentage point higher than the 12-month low.
The July increase in unemployment raised the three-month average to 4.1 percent, coming close to the 50-basis-point mark relative to the low point from May to July 2023. Although the Sahm indicator has been historically accurate, Federal Reserve Chairman Jerome Powell has indicated that the Sahm rule is not a guarantee of a recession, and that the labor market will normalize.
Impacts on sentiment
When the Federal Open Markets Committee met on July 30 and 31, the policymakers elected to leave rates unchanged. However, there is mounting pressure on the Fed to maintain the hopes of a “soft landing.”
The Fed has acknowledged that they watch employment closely and do not focus exclusively on inflation. Most economists now predict that the Fed will begin to lower rates at its next meeting on Sept. 17 and 18. The original prediction was that the Fed would lower rates by 25 basis points. In response to July’s employment figures, the consensus now is that the Fed will cut short-term rates by 50 basis points, with at least another cut by December. Investor sentiment regarding pending Fed cuts has caused the U.S. treasury rate to drop significantly in the previous two weeks—the 10-year treasury is at its lowest level all year.
Potential interest rate cuts should begin to have positive effects for both real estate investors and lenders. Lower debt costs could help motivate investors to get off the sidelines and back into the market. Lower rates could help lenders faced with borrowers previously unable to refinance maturing debt.
Recession fears, however, will cause investors and lenders to remain diligent. Most real estate sectors, especially the apartment sector, are performing well due to strong demand and record low vacancies. In addition, high home prices and still-high mortgage rates have caused the apartment sector to remain strong.
Stephen A. Sobin is president & founder of Select Commercial Funding LLC, a nationwide commercial mortgage brokerage company. He is a member of the Inter-Capital Group and the Commercial Finance Broker Network, both nationwide alliances of commercial mortgage professionals. Read previous columns by Stephen A. Sobin.
